LONDON: British government bonds and short sterling futures rallied on Wednesday after an unexpected up-tick in the unemployment rate slightly dampened expectations of a rate hike.
British yields fell after the unemployment rate edged up to 7.2 percent in the three months to December from 7.1 percent in November, reinforcing the Bank of England's message that there is no rush to raise interest rates.
But economists said, overall, the data showed the labour market continued on a solid footing, with wage growth rising on the year in the three months to December and claims of jobless benefits falling in January by more than expected.
"There has been a marginal shift out in expectations," said Sam Hill, economist at RBC Capital Markets.
But he said the rise in gilts had been overdone: "I don't think really today's data changes the assessment as far as the Bank of England are concerned."
Short sterling futures were up 2.5 to 4.5 basis points across the 2015 strip, with the March 2015 contract hitting its highest in a week at 99.12.
That contract was last up 2.5 basis points at 99.09 and the December 2015 contract - the most heavily traded this trading session - was up 4.5 basis points at 98.48.
British gilt futures rose to 110.66 - the highest in two weeks. They were last up 32 ticks at 110.47 at 1450 GMT, pushing 10-year British yields 3 basis points lower to 2.72 percent, just off an earlier 13-day low of 2.702 percent.
"The risk of a rate hike has decreased in market pricing but I wouldn't say it's materially changed the timing," Simon Peck, rate strategist at RBS said, adding that the market was fully discounting a rate hike in the first quarter of 2015 and that the risk of one at the tail end of this year had decreased.
Britain will sell 3 billion pounds ($5.0 billion) of the 10-year benchmark gilt via auction on Thursday.
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