UK’s cost of borrowing falls to a record low

THE British government’s cost of borrowing fell to a record low yesterday, as investors piled into gilts while the Eurozone appeared to lurch towards a fresh sovereign debt crisis.

While yields on Spanish and Italian debt spiked above six per cent – breaching the so-called crisis level – traders rushed to buy bonds from supposedly safe-haven debtor nations like the US, UK and Germany.

The yield on 10-year UK bonds tumbled to hit 2.7 per cent, while US treasuries hit 2.71 per cent and German bunds hit 2.42 per cent.

Meanwhile, construction data offered a ray of hope for third-quarter GDP. Although the Markit/CIPS purchasing managers’ index (PMI) edged down from 53.6 points in June to 53.5 in July, it was above expectations for 53 points and comfortably above the 50 point watermark that separates growth from contraction.

However, the National Institute for Economic Research (NIESR) will today downgrade its forecasts for UK economic output in 2011 from 1.4 per cent to 1.3 per cent, and warn that the chancellor will miss his primary target of balancing the cyclically adjusted current budget by 2015–16 by around one per cent.