gilts rose the most in three weeks as European stock markets declined and corporate bond risk surged, stoking appetite for the safety of government debt.
The advance pushed 10-year yields down from the highest level in 2 1/2 months after the FTSE 100 Index snapped two days of gains as HBOS Plc, the U.K.'s biggest mortgage lender, said profit fell. Gilts also climbed as a government report showed Britain's economy grew at the slowest pace in more than a year, adding to the case for the Bank of England to cut interest rates.
``There's deteriorating sentiment in corporate bond markets and general market sentiment has turned to the worse,'' said Kornelius Purps, a fixed-income strategist at Unicredit Markets & Investment Banking in Munich. ``Concerns about a financial crisis are spreading. This is supporting government bond markets, gilts as well.''
The yield on the 10-year gilt, most sensitive to the inflation outlook, fell as much as 7 basis points to 4.65 percent, and was 2 basis points lower at 4.69 percent by 2:18 p.m. in London. It climbed to 4.74 percent yesterday, matching the highest level since Dec. 18.
The price of the 5 percent bond due March 2018 rose 0.18, or 1.8 pounds per 1,000-pound ($1,985) face amount, to 102.38.
Two-year yields slipped 2 basis poinst to 4.29 percent. Yields move inversely to bond prices.
The pound fell against all 16 most-traded currencies tracked by Bloomberg today as traders bet a slowing economy will force the U.K. central bank to cut borrowing costs. It dropped to near a six-week low against the euro, sliding to 75.83 pence, from 75.35 pence yesterday and traded at $1.9852 from $1.9871.
`Negative Surprises'
``Sterling is under pressure as the data we had today has not been supportive,'' said Ian Stannard, a London-based currency strategist at BNP Paribas SA. ``Growth is going to be weak and we're likely to see a few negative surprises. We may see the Bank of England stepping up rate cuts.''
The pound will fall to $1.90 by midyear and $1.85 ``toward the end'' of 2008, Stannard said. That's the third most bearish forecast in a Bloomberg survey of 39 analysts.
U.K. stocks declined, led by HBOS, which said second-half profit fell 8.9 percent and that it faces an ``uncertain'' future after it wrote down the value of subprime mortgage-related investments. Alliance & Leicester Group Plc, the second worst- performing U.K. bank this month, and Royal Bank of Scotland Group Plc also fell.
Europe's Dow Jones Stoxx 600 Index retreated for the first time this week, dropping 1.3 percent. U.S. index futures slipped as Fannie Mae, the largest source of money for U.S. home loans, posted a $3.55 billion fourth-quarter loss.
Corporate Risk Climbs
The cost of protecting European corporate bonds from default rose today, according to traders of credit-default swaps.
Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increased 7 basis points to 537 today, according to Deutsche Bank AG. The index is a benchmark for the cost of protecting bonds against default and a rise indicates deterioration in the perception of credit quality.
Gross domestic product in the U.K. rose 0.6 percent in the three months through December, the least since the third quarter of 2006, the government said today, confirming an estimate made Jan. 23. Consumer spending climbed 0.2 percent, compared with the 0.6 percent median forecast of 14 economists in a Bloomberg survey.
Britain's economy will expand 1.8 percent in 2008, matching the slowest pace in 16 years, a survey of 42 economists published by the Treasury on Feb. 20 predicts.
Faster Inflation
Gilts declined in the past week as traders bet the Bank of England's ability to lower borrowing costs will be limited by rising consumer prices. Inflation accelerated to 2.2 percent in January, holding above the bank's 2 percent target for a fourth month.
``We like gilts for macroeconomic reasons,'' said Peter Schaffrik, a Frankfurt-based fixed-income strategist at Dresdner Kleinwort, the investment bank owned by Germany's Allianz SE. ``The big question is how much the Bank of England can move with the discrepancy between the weakness on the economic front and rising inflation. We believe the former will win out.''
Gilts also gained before Federal Reserve Chairman Ben S. Bernanke's testimony to the U.S. Congress today, in which he may signal the need for further rate reductions to avoid a recession in the world's largest economy.
The implied yield on the sterling interest-rate futures contract due December dropped 3 basis points to 4.78 percent today as traders added to bets U.K. borrowing costs will fall.
The Bank of England will cut its main rate from 5.25 percent to 5 percent by midyear and 4.75 percent by Dec. 31, according to the weighted average of 19 forecasts in a Bloomberg survey. The Monetary Policy Committee's next decision is due March 6.
To contact the reporter on this story: Agnes Lovasz in London atalovasz@bloomberg.net
