By Anchalee Worrachate Nov. 24 (Bloomberg) -- U.K. gilts declined and the pound fell against the euro and the yen on speculation the government will have to increase borrowing to a record as a looming recession chokes tax revenue. Ten-year gilts snapped four days of gains and the cost of hedging against losses on government bonds rose to a record before Chancellor of the Exchequer Alistair Darling presents a pre-budget report to Parliament today, in which he will outline the government’s spending plans. Britain will sell 138.1 billion pounds ($207 billion) of gilts this fiscal year, an all-time high, according to the median forecast of 11 U.K. primary dealer banks surveyed by Bloomberg. “Spending will need to rise massively while revenue is falling,” said Marc Ostwald, a fixed-income strategist at Monument Securities in London. “We are going to have a colossal amount of gilt issuance. The yield on the 10-year note climbed five basis points to 3.90 percent as of 11.42 a.m. in London. The price of the 5 percent security due June 2018 fell 0.37, or 3.70 pounds per 1,000 pound ($1,501) face amount, to 108.63. The two-year yield rose four basis points to 2.00 percent. Yields move inversely to bond prices. The pound dropped to 84.52 pence per euro, from 84.37 pence last week. It also fell to 143 yen from 143.17 yen. The currency traded at $1.4978 from $1.4925. Sterling lost 34 percent against the dollar since June. ‘Short the Pound’ Investors should sell the pound against the Swiss franc because financial markets “remain in deep recession mode,” JPMorgan Chase & Co. said in a report. “Stay long the creditor currencies and short the debtor currencies,” analysts led by Jan Loeys, global head of market strategy, wrote in the report received late on Nov. 21. “So, long Japanese yen against the dollar and the euro, and short the pound against the Swiss franc.” A short position is a bet that a currency will fall. The amount of gilts sold this year may be more than double last year’s issuance and up from the 80 billion pounds the government estimated in March, according to Bloomberg’s survey. Credit-default swaps showed the cost of hedging against losses on British government bonds rose to an all-time high, with five-year contracts rising four basis points to 87.5, according to CMA Datavision prices. Rate-Cut Speculation Further declines in gilts may be limited by speculation the Bank of England will accelerate interest-rate cuts amid signs of a deepening global recession. The two-year yield fell below 2 percent on Nov. 20 for the first time in at least 16 years. U.K. gilts outperformed U.S. Treasuries this quarter, handing investors a 0.23 percent gain. U.S. government bonds lost 0.15 percent during the same period, according to Merrill Lynch & Co.’s U.S. Master and U.K. Gilts indexes. “We are likely to have a big rise in gilt supply,” said Matteo Regesta, a fixed-income strategist at BNP Paribas SA in London. “But I think the market will be able to absorb it. Bonds should continue to be underpinned by flight to quality as the world is still grappling with the crisis.” The Bank of England cut its key interest rate by a greater- than-expected 150 basis points on Nov. 6 to contain the fallout from the global turmoil. Policy makers will lower the rate a further 75 basis points at the next meeting, according to a Credit Suisse Group AG index of probability based on overnight index-swap rates. To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net;

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