LONDON: British government bond prices edged higher on Monday, tracking an increase in US Treasuries driven by the prospect of continued loose monetary policy, despite a rise in US share prices to fresh record highs.
Ten-year gilt yields dropped 2 basis points on the day to 2.73 percent near the 10-day low of 2.719 percent hit earlier in the day while their spread versus Bunds held steady at 104 basis points, close to the eight-year high of 108.7 basis points struck on Nov. 14.
"Risk is on quite heavily with all the stock indexes up, and (gilt) yields are not really seeing the typical impact of that," said BNP Paribas fixed income strategist Shahid Ladha, referring to the tendency of gilt prices to fall when shares rally.
US Treasuries which gilts typically track closely were up on the day, which traders attributed to comments last week from future US Federal Reserve head Janet Yellen which pointed to further loose policy.
There was little British domestic news on Monday, and gilt investors' attention is focused instead on two bond auctions this week and the release of October's government borrowing data on Thursday.
Ladha said he expected the sale of 3.75 billion pounds ($6 billion) of the benchmark 10-year gilt on Tuesday to attract solid demand.
Tuesday's auction is the last for a medium-dated gilt this year, and cash flowing into the gilt market from coupon payments and redemptions should boost demand in coming weeks, he added.
Ladha also said the 10-year sector offered better value than five-year maturities, where gilts yield just 1.48 percent and fresh supply is coming on Thursday in the form of a 4.75 billion pound auction of a new 1.75 percent 2019 bond.
Gilts' relative appeal versus Bunds has been hit by evidence in recent weeks of Britain's improved economic prospects compared to those in the euro zone, culminating in last week's wide spread.
But Ladha expected some short-term relief from Thursday's public finances data, which he thought would show lower borrowing and fuel bets that the government's budget watchdog will revise down forecasts for future gilt issuance next month.
Ladha also noted a revival of investor interest in index-linked gilts, which suffered a knock last week after an unexpectedly sharp fall in inflation and lower Bank of England inflation forecasts.
Real yields on 10-year index-linked gilts were 3 basis points down on the day at -0.14 percent, meaning retail price inflation currently 2.6 percent will have to average 2.9 percent over the next 10 years for them to offer better value than the equivalent 10-year bond.
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