U.K. Two-Year Gilt Yield Reaches Record Low on Signs Global 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. 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 five basis points to 3.08 percent as of 10:25 a.m. in London. It slipped earlier to 3.06 percent, the lowest since March 23, 2009, according to Bloomberg generic price data. The 4.75 percent security maturing in March 2020 rose 0.45 or 4.5 pounds per 1,000-pound face amount, to 113.78. Two-year yields declined five basis points to 0.69 percent, after dropping to 0.686 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.

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.

The pound weakened 0.5 percent against the euro, trading at 82.19 pence from 81.79 pence at the end of last week. It was little changed at $1.5592. The currency weakened the most against the Swiss franc, declining 1.1 percent to 1.6205 franc.

European stocks declined, extending the biggest weekly drop in more than a month. The benchmark Stoxx Europe 600 Index lost 0.2 percent.

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 one basis point to 2.14 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.