Gilts underperform Bunds ahead of construction PMI

LONDON: Gilts fell in early trade on Monday, as investors braced themselves for a busy week of data releases as well as incoming Bank of England Governor Mark Carney's appearance before a parliamentary committee.

January construction PMI data is due at 0930 GMT, which will be closely eyed for any signs that the economy will contract again in the first three months of 2013, tipping it back into recession.

Big falls in construction output were a major factor behind Britain's 2011-12 recession, despite its small share of the economy.

"As much as it's not huge, there is an eye on the construction sector even though official data and the construction PMI are not necessarily always singing from the same hymn book," said Ostwald.

"We're keeping an eye on that. If there is a little bit of a pick up there, then that will be ... a bit more optimism and that will weigh on gilts," he added.

At 0915 GMT, the March gilt future was 67 ticks lower at 115.72, underperforming the equivalent Bund future was 34 ticks lower.

"Bunds are eminently not doing quite as badly today because periphery is suffering," said Monument Securities strategist Marc Ostwald.

"The periphery is very much under a cloud - above all Spain - and part of it is domestic, in terms of gilts' underperformance at the long end," he added.

Spain's opposition Socialist Party called for the resignation of Prime Minister Mariano Rajoy over a corruption scandal on Sunday as a poll showed the lowest support on record for his centre-right People's Party (PP).

Media reports over the past two weeks alleged at least a dozen senior PP officials, including Rajoy, received payments from a slush fund operated by its former treasurer.

Ten-year gilt yields rose nearly 7 basis points to 2.16 percent, while their spread versus Bunds was 4 basis points wider at nearly 46 basis points.

Later in the week, markets will be closely watching testimony by incoming Bank of England Governor Mark Carney before parliament's Treasury Committee on Thursday for further clues on how he intends to run the central bank.