LONDON: Gilts drifted lower on Monday, as investors sought riskier assets on optimism that US policymakers would make progress in averting a fresh round of spending cuts and tax increases in the new year.
Leading US lawmakers expressed confidence on Sunday that they could reach a deal to head off looming across-the-board tax hikes and spending cuts, which could push the economy back into recession.
"Weekend reports that Congressional leaders have agreed to fast-track budget negotiations may prove positive for risk assets today," Lloyds strategists said.
At 1240 GMT, the December gilt future was 29 ticks lower at 120.22, while the equivalent Bund was 18 ticks lower.
Ten-year gilt yields rose nearly 3 basis points to 1.76 percent. Their spread versus Bund yields was 1 basis points wider at 41 basis points.
A key focus for gilt traders this week will be the minutes of the Bank of England's latest policy meeting, due out on Wednesday.
Bank of England policymaker David Miles said on Sunday that the central bank still had the firepower to boost the economy and had scope for further stimulus.
"We may need more stimulus... That will depend on how the headwinds holding back growth play out," he said.
Investors are also preparing for an auction of 4.5 billion pounds of 1 percent 2017 gilts on Tuesday and a syndicated sale of 0.125 percent 2044 index-linked gilts, expected by market participants on Thursday.
BNP Paribas strategist Shahid Ladha said he expected the Debt Management Office to sell 3.5 billion pounds of the linkers.
"This will be the last UK sovereign long-end supply event of 2012... (and) should meet with strong support from index extension, coupons and foreign demand," he said.
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