LONDON: Gilts plunged on Wednesday after US lawmakers reached an agreement to avoid an automatic round of fiscal tightening that could have pushed the world's top economy into recession.
European stocks climbed to highs not seen since May 2011, while stronger-than-expected British manufacturing data also weighed on safe-haven gilts.
The United States narrowly missed a 'fiscal cliff' after the Republican-controlled House of Representatives approved a bill that will raise taxes on top US earners, fulfilling President Barack Obama's re-election pledge.
"The market is in this euphoric mood of taking away a tail-risk associated with the US fiscal policy," said RBS strategist Andrew Roberts.
"The manufacturing PMI hasn't helped because that was obviously very strong," he added.
At 1248 GMT, the March gilt future was 129 ticks lower at 117.63, while the equivalent Bund was 150 ticks lower on the day.
Earlier in the session, gilts extended losses by almost 30 ticks after the manufacturing data, hitting a 13-day low.
The Markit/CIP Manufacturing Purchasing Managers Index (PMI) rose to a 15-month high in December from an upwardly revised 49.2 in November, a far stronger increase than predicted in a Reuters poll of 24 economists.
Manufacturing makes up just 10 percent of British output, so construction and services PMIs due on Thursday and Friday will give a stronger guide to the health of the economy as a whole.
On Thursday, Britain's Debt Management Office will auction 3.75 billion pounds ($6.05 billion) of 1 percent 2017 gilts.
"I still think they offer very good and strong risk reward. I've no problem arguing that that is going to go well," Roberts said.
Ten-year gilt yields rose 11 basis points to 1.95 percent, with their spread over equivalent Bunds 2 basis points wider at 52 basis points.
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