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Bonds round-up: UK rate cut hopes revived

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Date: Monday 28 Apr 2008

LONDON (ShareCast) - Another gloom-laden report on the UK housing market – this one from estate agent Savills – has revived hopes of a cut in UK interest rates next month, and boosted demand for gilts.

House prices could plunge by a quarter by the end of next year if the credit crunch continues to batter consumer confidence, a new survey claimed today.

Estate agent Savills said the worst case scenario would see prices slump 10% in 2008 and another 15% in 2009, although the “super prime” market will avoid a sharp drop.

However, if the Bank of England takes all necessary steps to cure the credit crisis, the company’s revised forecast puts the overall house price decline at just 6%. A 4% drop in 2008 and 2% next year assumes the impact of the credit problem is restricted to the financial sector.

The yield on the 10-year gilt responded to the report by climbing 5 basis points to 4.74%, while the two-year gilt’s yield rose 6 ticks to 4.5%. Yields move inversely to bond prices.

In the US, government bonds were also on the up, with two-year notes having their first good trading session in ten days, ahead of economic data this week which is expected to show the US economy continuing to seize up.

The yield on the benchmark two-year note fell 6 basis points to 2.36%, while the ten-year note saw its yield trimmed to 3.85% from 3.88%.

Europe was out of step with the UK and US as government bonds drifted gently lower after inflation in six German states unexpectedly eased. The yield on the 10-year bund rose one basis point to 4.2%.