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Gilt Yield Drops to Week Low as Home Prices Fall

Gilts rose for the first time in three days after a Bank of England survey showed households and companies faced tighter borrowing terms, fueling speculation the central bank will resume asset purchases next month.

Ten-year yields dropped the most in a week as a government report showed Britons’ disposable income declined in the first quarter. Gilts extended gains on bets European Union leaders will fail to agree on ways to contain the region’s debt crisis at a two-day summit starting today in Brussels. The pound weakened for a second day against the dollar.

The central bank’s “lending survey above all confirms to people we are getting more quantitative easing next week,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “That’s a slam dunk after that survey. Part of the support to gilts is coming from euro-zone concerns.”

The 10-year gilt yield dropped five basis points, or 0.05 percentage point, to 1.64 percent at 4:06 p.m. London time after dropping as much as seven basis points, the most since June 21. The 4 percent bond due March 2022 rose 0.44, or 4.40 pounds per 1,000-pound ($1,557) face amount, to 121.03.

Spreads on secured lending to households widened in the second quarter and are expected to expand significantly in the third, the central bank said in its credit conditions survey. Only large companies escaped a tightening of borrowing terms in the second quarter and spreads on loans to firms of all sizes are predicted to rise markedly, it said.

Disposable Income

U.K. disposable incomes fell for a second quarter in the first three months of the year, the Office for National Statistics said in London. Gross domestic product shrank 0.3 percent in the first quarter, pushing Britain into its first double-dip recession since the 1970s, the office said.

Gilts rallied as investors anticipated policy makers will increase their bond-buying target at their July 4-5 meeting to stimulate economic growth. The central bank will extend its asset-purchase program by 50 billion pounds to 375 billion pounds at the meeting, according to a Bloomberg News survey.

Governor Mervyn King said on June 26 his out-voted call for more stimulus at the June gathering reflected his concern the global economic outlook was deteriorating.

European leaders meeting today will consider measures to stem the debt turmoil as EU President Herman Van Rompuy’s road map to strengthen the euro and financial oversight ran into immediate opposition from Germany. German Chancellor Angela Merkel is increasingly isolated as French President Francois Hollande, Italian Prime Minister Mario Monti and Spanish Premier Mariano Rajoy unite to push for quicker action.

‘Awful Lot’

Spanish 10-year yields climbed as high as 7.01 percent today, surpassing the 7 percent level that forced Greece, Ireland and Portugal to request outside aid. German bunds rose, with yields falling five basis points to 1.51 percent.

“An awful lot depends on Europe,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley in London. “Bunds are doing OK at the moment so gilts are just hovering behind them.”

Gilts have returned 2.6 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 2.2 percent.

The pound fell 0.4 percent to $1.5512, and was little changed at 80.13 pence per euro.

Sterling may drop to its June 1 low of $1.5269 if it weakens below the June 15 low of $1.5476, according to data compiled by Bloomberg.

The U.K. currency has weakened 1.2 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. Only the Norwegian krone has declined more, losing 1.3 percent.

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