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Date: Tuesday 06 May 2008

LONDON (ShareCast) - Gilts surged ahead on Tuesday after the UK service sector indictor rose, raising expectations of an interest rate cut.

The Chartered Institute of Purchasing and Supply's measure of the sector’s strength, which accounts for around two-thirds of the UK economy, fell to 50.4 in April from 52.1 in March.

It was far worse than the 51.7 predicted by analysts and means the sector is dangerously close to the 50 mark, below which indicates contraction.

The input prices component of today’s report soared to its highest since records began in 1996, up to 67.3 in April from 66.2 the month before, while the prices charged index fell to 55.2 from 56.2.

Two year gilt yield fell 8 basis points to 4.42% while the ten-year yield dropped 7 basis points to 4.67%. European gilts also received a fillip from the news, with the German ten-year bund yield falling 3 basis points to 4.13%.

US treasuries were also higher with the ten-year note yield down 3 basis points to 3.83%.