Gilts Advance for Third Week on Concern Global Economic Growth Will Slow

U.K. government bonds advanced for a third week as concern that global economic growth will fade in the second half of the year stoked demand for the safety of fixed-income assets.

Two-year yields reached the lowest level on record after the Federal Reserve said the U.S. recovery will be slower than expected and the Bank of England cut its forecast for U.K. growth. The pound dropped for the first week in five against the dollar as Nationwide Building Society said consumer confidence slid a third month in July, and the number of people claiming jobless benefits fell less than analysts estimated.

“Risk aversion started to resurface particularly violently after the Fed meeting, and the Inflation Report painted a gloomier picture more specifically for the U.K.,” said Chiara Cremonesi, a strategist at UniCredit SpA in London. “There aren’t many triggers that could lead to a shift, but because yields are so close to historic lows there isn’t so much room for a further sharp rally.”

The yield on the 10-year government bond fell 11 basis points to 3.12 percent as of 4:30 p.m. in London yesterday, from 3.23 percent on June 8. The 4.75 percent security maturing in March 2020 gained 0.95, or 9.50 pounds per 1,000-pound ($1,560) face amount, to 113.43. Two-year yields reached 0.69 percent on Aug. 12, the lowest on record, before recovering to 0.73 percent.

The pound fell 2.2 percent to $1.5590. It was 1.7 percent stronger against the euro at 81.86 pence.

Meeting Minutes

While the U.K. economy expanded at the fastest pace in more than four years in the second quarter, the nation’s central bank revised down its forecast for growth in its quarterly Inflation Report. Inflation will be at about 1.5 percent in two years, less than the 2 percent goal, the bank said. The U.S. Fed’s policy statement said “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”

On Aug. 18, the Bank of England will publish the minutes of its Aug. 5 meeting, when policy makers kept the bank’s asset- purchase plan and the main interest rate unchanged. A report the day before may show U.K. inflation slowed in July, according to the median estimate of a Bloomberg survey, adding to the allure of government bonds.

Gilts returned 7.5 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. U.S. debt returned 7.4 percent and German securities handed investors an 8 percent profit.