LONDON: British government bonds extended last week's gains on Monday in line with German Bunds and some analysts said a new year sell-off had probably bottomed out in the absence of strong new signs on British or US central bank policy.
Eyes were fixed firmly on a speech by US Federal Reserve chief Ben Bernanke late in the evening European time (2100 GMT) as well as British inflation numbers due out early on Tuesday.
Simon Peck, strategist with RBS in London, said a sell-off around the end of 2012 looked to have brought 10-year gilt yields - pulled down by central bank bond-buying last year - back to fair value at around 2 percent.
Absent a strong signal from Bernanke, he said they looked likely to stay around that level over coming weeks.
"We've said 2 percent is about fair value and 2.0-2.1 percent could become the range for the next few weeks," he said.
"The risks are skewed towards a rally, so that could be more like 1.9-2.1 percent."
Prices moved little in afternoon trade after a morning surge. By 1630 GMT, 10-year yields had fallen 5 basis points to 2.03 percent, with their spread over equivalent Bunds 2 basis points tighter at 48 basis points.
The March long gilt future settled 56 ticks higher at 116.82, outperforming Bunds by 10 ticks.
A recovery last week was in part due to another batch of bearish data on the British economy, encouraging hopes - which had all but evaporated - that the BoE could yet deliver more monetary easing later this year.
Several analysts said bonds with maturities longer than 15 years were likely to suffer ahead of a syndicated sale of a 2044 bond this month, especially given what some said was recent outperformance compared to shorter-dated paper.
"Given the upcoming 2044 syndication, we believe that the curve will have to take the strain going into the supply event," analysts from Lloyds said in a note to clients. "We look for 5s30s curve to steepen over the coming weeks, as the front end will also remain anchored."
They also said 30-year gilts looked overpriced compared to equivalent US Treasuries. Still, yields on the 30-year gilt fell more than 4 basis points on Monday.
Data on Tuesday is seen showing inflation holding steady at 2.7 percent in December - high enough to worry the central bank into holding off on more easing, but well off levels above 4 percent seen in recent years.
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