Gilt Yields Fall to Records as BOE Says It May Consider Rate Cut

U.K. government bonds rose, with two- and five-year yields falling to records, after policy makers said they may consider the case for cutting interest rates again as Europe’s debt crisis worsens.

Ten-year gilts advanced for a third week as the International Monetary Fund cut its growth forecast for Britain’s economy, boosting demand for the safety of government debt. Sterling climbed to the strongest since 2008 versus the euro as a slide in Spanish and Italian bonds added to concern European leaders are failing to contain the region’s financial turmoil. German two-year yields were negative for a third week.

“There’s a lot of hunt for yield activity going on with investors seeking to gain the remaining bits of positive yield,” said Sam Hill, a gilt strategist at Royal Bank of Canada in London. “On that basis, the U.K. still stands out as looking relatively attractive.”

The 10-year gilts yield fell six basis points, or 0.06 percentage point, this week to 1.49 percent at 5 p.m. in London yesterday, approaching the record 1.439 percent set on June 1. The 4 percent bond due in March 2022 gained 0.605, or 6.05 pounds per 1,000-pound ($1,562) face amount, to 122.48.

Two-year yields dropped to 0.103 percent yesterday, and five-year rates declined to 0.472 percent on July 18, both all-time lows.

The Monetary Policy Committee said while the arguments for and against cutting the benchmark rate from the current record low of 0.5 percent hadn’t changed since June, they may be reviewed in the coming months, according to the minutes of the July 4-5 meeting released July 18. The MPC voted 7-2 to increase quantitative easing by 50 billion pounds at the meeting.

IMF Forecast

The IMF cut its forecast for Britain’s gross domestic product to 0.2 percent for this year, from a previous prediction of 0.8 percent, and lowered its estimate for 2013 to 1.4 percent from 2 percent in April.

Economists say a report on July 25 will show the U.K. economy contracted by 0.3 percent in the second quarter from a year earlier, according to a Bloomberg News survey.

“If it were to be a weaker number the market could make further progress,” RBC’s Hill said. “Any further evidence of even weaker growth will fuel expectations of even more QE.”

Gilts have returned 1.6 percent this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. They gained 16 percent over the past year as investors sought alternatives to euro-area assets.

The pound rose 1 percent this week to 77.84 pence per euro after climbing to 77.71 pence yesterday, the strongest since October 2008. Sterling gained 0.4 percent to $1.5629.

The pound has strengthened 2 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The euro fell 5.5 percent, and the dollar gained 1.4 percent.

The Debt Management Office plans to sell index-linked gilts maturing in 2044 through banks next week.

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