U.K. Two-Year Notes Rise After Coordinated Interest-Rate Cuts

By Agnes Lovasz

Oct. 8 (Bloomberg) -- U.K. government two-year notes rose after the Bank of England joined central banks around the world in cutting interest rates to ward off a collapse of the financial system.

The U.K. central bank reduced its key rate half a percentage point to 4.5 percent a day before its scheduled decision. Policy makers in the U.S., euro region, Sweden, Switzerland, Canada and China also reduced rates. The U.K. government said earlier it will invest 50 billion pounds ($87 billion) in the nation's banks to help ease the lending freeze.

``The rate cut in the context of the plans to bail out the financial sector tells you that U.K. policy is coming to terms with the problem,'' said Russell Jones, head of global fixed- income and currency research in London at RBC Capital Markets. ``The general situation for global bond markets is good and that extends to the gilt market.''


The yield on the two-year gilt dropped 16 basis points to 3.44 percent. The price of the 4.75 percent security due June 2010 climbed 0.25, or 2.5 pounds per 1,000-pound ($1,741) face amount, to 102.09. The 10-year gilt was little changed, yielding 4.23 percent. Bond yields move inversely to prices.

The pound slipped to $1.7422 as of 2:10 p.m. in London, from $1.7455 yesterday. The currency fell to 78.19 pence per euro, from 77.87 pence.

That pushed the difference in yield, or spread, between two- and 10-year gilts to 80 basis points, the widest since July 2003, as investors favored shorter-dated maturities.

``The environment favors the short end rather than the long end because we're going to see a great deal more supply,'' said Jones. ``And you could argue there's still lot more potential for rate cuts in the U.K.''

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net