The pound and gilts tumbled as growing concern about the U.K.’s creditworthiness prompted investors to sell assets denominated in the currency. The gains drove yields on 10-year government bonds to the highest level since May 8 after Standard & Poor’s cut the outlook on the U.K.’s AAA credit rating yesterday to “negative.” The Treasury plans to auction a record 220 billion pounds ($347 billion) of gilts this fiscal year, 50 percent more than last year, to help drag the economy out of the recession. “Worries over the supply outlook and the long-term prognosis for sovereign debt ratings is keeping government debt markets under pressure,” said John Wraith, head of sterling interest-rate strategy in London at RBC Capital Markets. The pound fell 0.4 percent to 88.07 pence per euro as of 10:30 a.m. in London, and was little changed at $1.5852. The yield on the 10-year gilt advanced four basis points to 3.7 percent, bringing its gain this week to 17 basis points. The 4.5 percent note due March 2019 fell 0.35, or 3.5 pounds per 1,000-pound face amount, to 106.49. The yield on the two-year note was little changed at 1.02 percent. Bonds stayed lower after a government report showed gross domestic product dropped 1.9 percent in the first quarter, matching the median forecast of economists in a Bloomberg survey. Consumer spending fell 1.2 percent and investment slid 3.8 percent, a separate report showed. The economy may be about “three quarters” through the recession, Bank of England policy maker David Blanchflower said yesterday. Deputy Governor Charles Bean said “the bottom in activity may not be far off” and the pace of economic contraction should ease as de-stocking by companies slows. “While we recognize that U.K. fundamentals remain bleak, as highlighted by the recent rating outlook downgrade, we think much of the bad news is in the pound price,” Yilin Nie, a New York-based currency strategist at Morgan Stanley, wrote in a research note yesterday.

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