LONDON: British government bonds rallied modestly on Tuesday after a solid sale of 7-year debt and weak British manufacturing data, but gains were limited by stronger US figures and the large sum of gilts investors tried to offload to the Bank of England.
Gilt futures finished the session just 8 ticks up on the day at 115.69, well off the session high of 116.21, which had been reached courtesy of a weaker than expected manufacturing PMI reading and surprisingly solid demand at a sale of 3.75 billion pounds ($6 billion) of 7-year gilts.
Investors had feared might the sale might be a struggle due to major continental European markets being closed, and the futures volume was low, with fewer than 70,000 contracts traded by 1600 GMT.
Gilts fell off their session high after the BoE said it was offered some 4.3 billion pounds of gilts at its last buyback of gilts with maturities of 15 years and over, compared with the 1.6 billion pounds it was seeking, giving an offer-to-cover ratio of 2.68, almost double the previous week's.
"Because it was the second last buyback ... we were already expecting a higher cover ratio (but) given thin liquidity ... that led to a sell-off," said Vatsala Datta, strategist at Lloyds Bank WBM.
Ten-year gilt yields were 1 basis point down on the day at 2.10 percent.
The BoE holds one more buyback, of 7-15 year gilts, on Wednesday, which will complete the 50 billion pounds of quantitative easing purchases approved in February. Most economists do not expect more quantitative easing (QE) to be approved when the BoE meets next week.
Gilts further extended losses after data showed the pace of growth in the US manufacturing sector picked up in April to its highest level in 10 months, sending Treasury prices lower.
"As global growth hopes are encouraged, the risk bid gains momentum and 'safe' UK gilts were seen to be better offered," 4CAST analysts said in a market comment.
Investors will be closely watching consumer credit and money supply data from the Bank of England due at 0830 GMT on Wednesday for clues about how the Bank's Monetary Policy Committee will vote at their rate-setting meeting next week.
"If we get a poor number tomorrow, that's going to give another reason to the doves in the committee to vote for more QE," Lloyds's Datta said.
Data released earlier on Tuesday showed an unexpectedly sharp slowdown in April manufacturing, fuelling a debate over whether the BoE will resort to injecting more monetary stimulus.
However, most strategists are doubtful the BoE will do more QE given the central bank's stated focus on strong figures from other economic surveys and on the failure of above-target inflation to fall as fast as expected. As a result, there was little immediate reaction to the data.
"I think they will stick to their guns," said Monument Securities fixed income strategist Marc Ostwald. "Why should they do anything more at the moment unless they feel that the wheels are coming off of the economy? I think as far as they're concerned the jury is out on that."
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