UK borrowing cost at record low on weak services data
The UK government's cost of borrowing in markets briefly fell to a record low on Friday after data showed a sharp fall in service sector activity.
Activity fell in October at the fastest rate since April, Office for National Statistics (ONS) data suggested.
The 10-year gilt yield fell below 2% in thin pre-Christmas trading, as concern about the UK economy boosted demand for the safety of government debt.
Some economists fear the UK may be falling back into recession.
The 10-year gilt yield - which indicates the interest rate the Treasury would probably have to pay if it wanted to borrow more money for that period - later recovered to about 2.035%.
The yield has never before fallen below 2% throughout a history that stretches back to the Victorian era.
The low level reflects market expectations that the UK economy is likely to experience years of low growth and low inflation, with the Bank of England holding short-term interest rates close to zero.
The weak service sector data may also raise expectations that the Bank will buy further government debt next year as part of its "quantitative easing" policy to stimulate the economy - something likely to push the price of gilts up, and therefore push their yields down.
The US and Germany have also seen their borrowing costs fall to historic lows in recent months for similar reasons, while stagnant Japan has experienced ultra-low bond yields for the last 15 years.
The fall is in stark contrast with the experience of eurozone governments - other than Germany.
Their cost of borrowing has risen sharply in response to their economic troubles.
Unlike the UK and US, they do not control their own central banks or their own money supply, giving rise to market fears that they may run out of money to repay their debts.
The service sector accounts for about two-thirds of UK economic activity.
The seasonally-adjusted service sector index fell by 0.7% in October compared with the previous month, according to the ONS.
Earlier this month, the ONS reported that the UK's industrial output had also fallen 0.7% in October, the fastest fall for six months.
Analysts say the data may indicate the UK economy is starting to contract.
"The reported sharp fall in services output in October is a major blow to GDP growth prospects and significantly fuels concern that the economy could contract in the fourth quarter," said Howard Archer, chief European economist at Global Insight.
The drop in activity meant the three-month on three-month growth rate - seen by some analysts as a better underlying measure - fell to 0.2%.
However, recent survey data indicated the service sector may have recovered slightly in November.
The Markit/Cips services purchasing managers' index (PMI), published earlier this month, rose to 52.1 in November, up from 51.3 in October. Any figure above 50 indicates growth.
On Thursday, the ONS revised up its overall estimate for growth in the UK economy between July and September of this year.
The UK economy grew by 0.6% over the period, faster than previous estimates of 0.5%, with growth driven by strong performances in the service sector and construction.
However, the growth estimate for the second quarter of the year was revised down from 0.1% to zero.