LONDON: Gilts slid more than Bunds on Wednesday, pressured by a relaxation of capital and liquidity rules for British banks, while German government bonds saw strong demand at an auction.
The December gilt future settled 46 ticks down at 119.91, while the equivalent Bund was 15 ticks lower.
Britain's financial regulator said it had relaxed capital and liquidity rules on banks in an effort to stimulate lending, lifting bank shares.
"The liquidity buffers, which banks have spent the last four years raising, buying more safe-haven products, they are partly selling that, being allowed to sell that, run down those liquidity-buffer assets and lend the money out instead," said Andrew Roberts, head of interest rate strategy at RBS.
"That's the reason why it (the gilt market) just got a bit of sogginess."
Comments by BoE Governor Mervyn King that monetary policy cannot prop up Britain's economy forever also made some in the market worry about whether the central bank will extend its gilt-purchase programme in November, Roberts added.
King said there was no immediate barrier to stop the BoE doing more, but ultimately policymakers could not be "entirely sanguine" about using loose monetary policy to bring forward economic demand indefinitely.
Bunds, meanwhile, pared losses after an auction of five-year German debt drew demand more than twice the amount on offer.
"It was pretty well received and there is plenty of cash kicking around, so you've got a positive for Germany," said Lloyds strategist Eric Wand.
Otherwise, dealers were reluctant to take big positions as long as questions over Spain's possible request for a bailout persisted. The start of the company earnings season and uncertainty about the health of the global economy added to a murky backdrop.
Ten-year gilt yields rose 5 basis points to 1.777 percent, with their spread over Bunds 3 basis points wider at 28 basis points.
Gilts with maturities of 20 years and longer underperformed shorter-dated paper ahead of a syndicated sale of 30-year gilts later this month and what Lloyds strategists said were "market perceptions of potentially higher supply this year via deteriorating fiscal dynamics".
On Thursday, Britain will sell new 0.125 percent index-linked gilts due 2024. Lloyds' Wand said the auction should see decent demand, albeit tempered by a re-opening of the gilts on Dec. 13.
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