U.K. government bonds rose and the pound fell on speculation that Prime Minister David Cameron’s plans to cut spending will constrain both the budget deficit and economic growth. Gilts’ gains sent the 10-year yield to near its lowest in more than 14 months. The Treasury ordered ministers to draw up scenarios for cuts of 25 percent and 40 percent over four years, Transport Secretary Philip Hammond said on BBC 1 television’s “Andrew Marr Show” yesterday. U.K. services growth slowed more than economists forecast last month after the government’s austerity measures to cut the budget deficit sapped confidence. “The budget consolidation in the U.K. is going to have significant consequences for growth,” said Steve Barrow, head of Group-of-10 foreign-exchange research at Standard Bank Plc in London. “In sterling terms there could be a cost, while it plays into the hands of gilts to some extent.” The 10-year gilt yield fell four basis points to 3.32 percent as of 2:55 p.m. in London after reaching 3.31 percent on July 1, the lowest since April 2009. The 4.75 percent security maturing March 2020 rose 0.27, or 2.70 pounds per 1,000-pound ($1,511) face amount, to 111.77. The two-year note yield slipped four basis points to 0.74 percent. The pound was 0.6 percent lower at $1.5105, declining against the U.S. currency for the first day in three. It was 0.2 percent weaker at 82.84 pence per euro. Gilt Returns U.K. government bonds have returned 3.3 percent since the May 6 election, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts’ Societies, as Cameron’s coalition focused on managing the nation’s deficit in the wake of the Greek debt crisis. Robert Stheeman, the head of Britain’s debt-management agency, said last week that U.K. securities may benefit from being outside the euro area, as well as from the government’s cutbacks. German bonds returned 2.1 percent and U.S. Treasuries also handed investors a 2.1 percent profit since May 6, according to the indexes. “The virtues of managing an independent currency, and a blueprint for a return to sound fiscal policy and reduced gilt issuance have obviously helped gilts to outperform some of the less illustrious European Union members,” Kenneth Broux, an economist at Lloyds Banking Group Plc in London, said in an e- mailed note. Britain is scheduled to sell 3.25 billion pounds of bonds due in 2020 tomorrow. Short-Sterling Futures Markit Economics and the Chartered Institute of Purchasing and Supply said its gauge of service companies fell to 54.4 from 55.4 in May. Economists had forecast a reading of 55, according to the median of 22 estimates in a Bloomberg survey. The yield on the March 2011 short-sterling futures contract fell four basis points to 1 percent as investors added to bets interest rates will stay lower for longer. The U.K. Treasury said today it appointed Martin Weale to serve on the Bank of England’s nine-member interest rate-setting Monetary Policy Committee. The appointment will take effect in time for Weale to take part in August’s rate decision, it said. Weale “will be more likely to surprise” than Barker, said David Kern, chief economist at the British Chambers of Commerce in London. “It’s very difficult to classify him as a dove or a hawk.” To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

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