Gilt yields drop to new lows as fears of a return to recession rise

The UK's 10-year borrowing rates briefly fell below 2 per cent yesterday as the latest data from the Office for National Statistics indicated a likelihood that the British economy will contract in the final quarter of 2011.

Ten-year gilt yields dipped to 1.997 per cent in trading yesterday morning, the lowest since modern records began in 1989. Economists have warned that low yields, as well as signalling confidence from investors in the creditworthiness of the UK government, indicate market expectations of weak economic growth.

The seasonally adjusted index of services from the ONS shows that output fell by 0.7 per cent between September and October, its biggest fall in six months, undermining hopes that a resilient services sector will drag the British economy out of the mire.

There were signs of weakness across all parts of the sector with month on month declines registered in hotels, restaurants, communications, finance and transport and government services. Analysts said the disappointing data for October showed that the UK was now more likely to experience an economic contraction in the final quarter of this year.

Mortgage lending also remains weak, according to the British Bankers' Association (BBA). Mortgage approvals for house purchases fell back to 34,738 in November from 35,196 in October. The BBA said lending to companies is in decline. Net lending to non-financial companies fell by £700m in November after a rise of £1bn in October.