UK’s borrowing costs below those of US

The UK’s benchmark borrowing costs have fallen below those of the US for the first time in 15 months as markets continue to fret about the risk of a US default.

Yields on 10-year gilts, which move inversely to prices, hit a low of 2.93 per cent at about midday in London on Thursday, three basis points below Treasury yields at the time. gilt yields were last lower than Treasuries briefly in 2009 and April 2010 and before that throughout most of 2006.

The trend reversed in afternoon trading with gilt yields at 2.96 per cent and Treasuries at 2.95 per cent. Ten-year Treasuries had hit an intraday low of 2.93 per cent earlier in the afternoon.

The move comes despite intense worries in the UK about “stagflation”, the toxic mix of little or no growth and high inflation.

“You have this combination of weakness of the UK economy and renewed calls for QE [quantitative easing] and the short-term concerns in the US. There are just so many other problems to deal with before you get to the UK,” said Gary Jenkins, head of fixed income at Evolution Securities.

Gilt yields have fallen from a high this year of 3.88 per cent in February as the prospect of UK interest rate increases has receded amid poor economic growth.

But the move also comes against a backdrop of sharp fiscal cuts by the UK coalition government, in contrast to the political wrangling in the US about raising the debt ceiling.

Bill Gross, the founder of Pimco who runs the world’s largest bond fund, said only 18 months ago that gilts were “resting on a bed of nitroglycerine”. When he made the call, they were yielding slightly more than 4 per cent.

“Who would have thought 12-18 months ago that gilts would have been seen as a safe haven?” asked Mr Jenkins.

Gilt yields still have some way to go to catch German Bunds, however. Despite the eurozone debt crisis 10-year Bund yields were at 2.63 per cent on Thursday afternoon.