U.K. Two-Year Yield Reaches Record Low Amid Signs Economy Slows

U.K. gilts rose, pushing two-year note yields to a record low, as stock losses and signs the global economic recovery is stalling boosted demand for the relative safety of government securities.

The gains sent the 10-year yield to the lowest level since March last year before a report tomorrow that’s forecast to show consumer-price inflation slowed in July. London house prices fell in August, a survey today showed. Japan’s economy expanded at an annualized 0.4 percent rate in the three months to June 30, data showed today, lagging behind the 2.3 percent median economist forecast.

“The Bank of England won’t be able to raise interest rates anytime soon in this environment, and it’s likely to err on doing more rather than less to avoid Japanese-style deflation,” said Mohit Kumar, a fixed-income strategist at Deutsche Bank AG. “Demand for gilts, especially longer-dated maturities, will be underpinned.

The 10-year gilt yield dropped 10 basis points to 3.03 percent as of 5:07 p.m. in London, the lowest since March 20, 2009, according to Bloomberg generic price data. The Bank of England announced in March last year it would buy bonds to support the economy.

The 4.75 percent security maturing in March 2020 rose 0.84 or 8.4 pounds per 1,000-pound face amount, to 114.175. Two-year yields declined as low as 0.673 percent.

Prime Minister David Cameron’s plans to cut spending have damped concern the country may lose its AAA credit rating while boosting speculation the economic recovery will slow. Data last week showed consumer confidence slid a third month in July, and the number of people claiming jobless benefits fell less than analysts estimated.

House Prices

The pound fell against the euro as a survey showed asking prices for homes in the capital slipped 4.l1 percent on the month to an average of 405,058 pounds, Rightmove Plc said today. The drop is the biggest in two years and returns values to levels seen in January. Prices across England and Wales fell 1.7 percent.

The British currency weakened 0.1 percent against the euro, trading at 81.89 pence from 81.79 pence at the end of last week. It climbed 0.5 percent to $1.5676. The currency weakened the most against the Swiss franc, declining 0.7 percent to 1.6266 francs.

“We remain bearish on sterling,” said Mansoor Mohi-uddin, the Singapore-based head of the currency strategy at UBS AG. “Monetary policy is set to remain accommodative for a long time still. The combination of loose monetary and tight fiscal policy can be highly detrimental for a currency.”

European stocks declined, extending the biggest weekly drop in more than a month. The benchmark Stoxx Europe 600 Index lost 0.7 percent.

German Spread

The yield difference, or spread, between 10-year U.K. gilts and German bunds narrowed to 72 basis points from 73 basis points on Aug. 13.

U.K. inflation rose 3.1 percent in July compared with a 3.2 percent rate in June, according to a median forecast by 31 economists in a Bloomberg survey.

The five-year breakeven rate, a gauge of market inflation expectations derived from a yield gap between regular and index-linked bonds fell four basis points to 2.12 percentage points. That compares 2.40 percentage points at the end of the second quarter and 1.72 percentage points a year ago.

Gilts handed investors 7.4 percent this year compared with 8.1 percent from German bonds and 7.7 percent for U.S. Treasuries, according to indexes compiled by European Federation of Financial Analysts Societies and Bloomberg.