U.K. 10-year gilt yields slid to the lowest level in at least 20 years and the pound fell as bank shares tumbled and policy makers prepared to buy government bonds to inject cash into the recession-trapped economy. Yields on gilts maturing from five years to 30 years dropped after Lloyds Banking Group Plc ceded control to the government and HSBC Holdings Plc sank as much as 14 percent in London trading. The Bank of England said March 5 it plans to spend 75 billion pounds ($104 billion) buying corporate debt and government assets that have between five and 25 years to mature. “This banking-nationalization talk is keeping banking stocks well depressed and that’s supportive for gilts,” said Orlando Green, a fixed-income strategist in London at Calyon, the investment-banking unit of France’s Credit Agricole SA. “The five- to 25-year part of the curve is going to be well supported given that quantitative easing is going to be centering around the 10-year region.” The 10-year gilt yield dropped as much as 11 basis points to 2.95 percent, the lowest level since Bloomberg began tracking the data in 1989. The security yielded 3.02 percent as of 12:46 p.m. in London. The 4.5 percent note due March 2019 rose 0.45, or 4.5 pounds per 1,000-pound face amount, to 112.73. The yield on the security posted its biggest two-day drop since at least 1989 at the end of last week after policy makers also cut the main interest rate on March 5 to 0.50 percent, the lowest level in the bank’s 315-year history. The U.K. is the first country to start so-called quantitative easing since Japan tried to stimulate its economy in the 1990s by printing money. Shrinking Economy The U.K. economy shrank 1.5 percent in the fourth quarter, the most since 1980, a government report showed Feb. 25. The central bank on Feb. 11 forecast it will contract at an annual 4 percent by the end of this quarter. The Bank of England may spend as much as 65 billion pounds on government securities in the next three months and about 10 billion pounds on company bonds, according to RBC Capital Markets. Policy makers “expect the corporate-paper facility to see no more than 10 to 15 billion pounds of bonds delivered to them,” John Wraith, head of sterling interest-rate strategy at RBC Capital Markets in London, wrote in a March 6 note. “This implies 60 to 65 billion pounds of gilt purchases over the next three months.” Analyst Recommendations Investors should bet on the difference in yield, or spread, between two- and seven-year U.K. government notes narrowing to as little as 75 basis points as the Bank of England starts buying gilts, RBC said today. HSBC Chairman Stephen Green said last week the 2003 purchase of Illinois-based Household International, which led to billions of dollars of losses as the U.S. housing market collapsed, was a mistake. The FTSE 350 Banks Index fell 8.1 percent today and the FTSE 100 Index dropped 1.6 percent. Futures on the Dow Jones Industrial Average declined 1.9 percent. “Banking stocks in the U.K. are under pressure today,” said Steven Barrow, head of G-10 currency research at Standard Bank Plc in London. “That backdrop is negative for sterling.” The pound dropped 2.3 percent to $1.3769 as of 12:55 p.m. in London. It weakened 1.6 percent to 91.22 pence per euro, depreciating to 91 pence for the first time since Jan. 29.

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