LONDON: Gilt futures rose on Wednesday after Britain's budget deficit narrowed more than expected last month and the Bank of England left the door open for more asset purchases, while ultra-cheap loans to banks from the ECB failed to dispel euro zone worries.
Strategists said the combination of factors lent support to British government debt in thin pre-Christmas trade, as leading UK shares slipped by two-thirds of a point.
The March gilt future settled 53 ticks higher on the day at 116.33, outperforming the equivalent German Bund future by 20 ticks.
Bank of England minutes from the Monetary Policy Committee's (MPC) December meeting were seen as dovish, confirming the view that it will expand its gilt-buying programme in February to support the flagging economy.
"Gilts were supported before the ECB (tender) and that might have been to do with the dovish MPC minutes," said Credit Agricole strategist Orlando Green. "The debt numbers were also reasonably good as well. The turnaround in Bunds also helped."
German bunds reversed initial losses to trader higher on the day with other safe-haven assets.
Banks took a huge 489 billion euros at the European Central Bank's first ever offering of three-year funding, providing hope a credit crunch can be avoided but highlighting the scale of the pressures European banks are under.
Spanish and Italian bond yields rose after the liquidity tender, suggesting banks were not using their low-cost loans to buy high-yielding euro zone sovereign debt as some had hoped and leaving markets still craving a definitive crisis solution.
"It's still a sign of struggling banks which can't fund themselves in any other way," said John Wraith, fixed-income strategist at BofA Merrill Lynch Global Research.
"It's still an open question whether banks are really keen to go and get lots more peripheral debt on their books, given the problems that they've had as a result of owning peripheral debt already."
In the cash market, the yield on 10-year gilts was about 6 basis points lower at 2.042 percent. The yield spread between gilts and German Bunds was little changed at 11 basis points.
The domestic focus turns on Thursday to final third quarter GDP data which are expected to confirm that Britain's economy grew by 0.5 percent between July and September.
Weak growth over the last year and worries about the euro zone have prompted several forecasters to predict a modest recession in Britain early next year.
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