LONDON: Yields on British government bonds hit an eight-month high on Friday after the US Federal Reserve expressed doubts about more bond purchases, although weak British services data limited gilts' fall relative to euro zone debt.
In a surprise for markets, minutes from the Fed's December policy meeting released late on Thursday showed a growing reticence about further increases in the central bank's $2.9 trillion balance sheet.
"The market was caught offside by that," said Marc Ostwald, gilts strategist at Monument Securities. "There is a sense that a lot of the QE-type sponsorship for the (global fixed income) market is fading."
A sharp fall in price pushed the 10-year gilt yield to an eight-month high of 2.139 percent at 1242 GMT, some 6 basis points up on the day, and extending a rise in yields that started on Jan. 2 after a US budget deal. Late on Friday the yield was still close to those levels, at 2.128 percent.
March gilt futures hit a contract low of 115.75 and settled 59 ticks lower on the day at 115.88.
Gilts prices in both the cash and the futures market fell less on the day than those for German and French debt, however, after a much weaker than expected British services PMI broke a recent trend of underperformance by gilts.
Similar surveys in the euro zone fuelled hopes the bloc may be through the worst of its economic slump.
But in Britain, December's services PMI sank to its lowest level since April 2009 and contracted for the first time in two years, raising the risk the economy will return to recession.
"I don't think that it makes anyone think the (Bank of England) will back more QE next week but it's a bit of a surprise," Ostwald said. "People were erring to making slightly more positive assumptions about the UK economy, and then that came out and rather put a red pen through that idea."
Before the data, 10-year gilt spreads over Bunds rose to 61.2 basis points, their highest level since September 2011, and gilts yielded more than French 10-year bonds for the first time since April 2011.
"It's definitely been a surprise to me that gilts have been so weak on a cross-market basis in the past few days," said Sam Hill, gilts strategist at RBC.
"But when you throw in the consideration that QE is now less likely in the UK, it is understandable given gilts have had such a strong run that overweight investors might reconsider their positions. Fiscally, there are some similarities between France and the UK ... so it comes down to monetary policy aspects."
Later in the session, after the services PMI came out, gilts' spread over Bunds tightened by more than 5 basis points from its peak to stand at 58 basis points, little changed on the day, and the spread over French debt showed a similar move.
Next week, the Office for National Statistics will release a recommendation on changes to the Retail Price Index used for index-linked gilts at 0700 GMT on Thursday, followed by the BoE's January policy decision at 1200 GMT.
Center>Copyright Reuters, 2013