LONDON: Gilts trailed a rise for Bunds early on Thursday after French and German manufacturing data painted a mixed picture of the euro zone economy, with investors looking to gross domestic product numbers on Friday for fresh domestic direction.
French business activity shrank in January at the fastest pace since the trough of the global financial crisis, sparking fears the euro zone's second-biggest economy may be in recession and countering a more positive number from Germany.
That followed a warning from the International Monetary Fund that financial markets may be being too optimistic about a global recovery, prodding investors to seek the safer ground of Europe's top-rated government debt.
At 0855 GMT, the March gilt future was 18 ticks higher at 117.42, not far off a one-week high of 117.55 reached earlier, while the equivalent Bund future was 26 ticks higher.
Investors will look towards on the release of fourth-quarter British GDP numbers on Friday, expected to show a 0.1 percent quarterly fall in output.
A bearish number would strengthen the case for the Bank of England to inject more money into the market - a potential positive for gilts. But minutes on Wednesday from the bank's last meeting showed officials increasingly doubtful of the chances of them doing so and poor growth also carries the threat of falling government revenues - and resulting higher bond issuance.
"UK markets will be trading with tomorrow's first release for Q4 GDP in mind, a release forecast to deliver a drop of 0.2 percent on the quarter," said Lloyd strategists.
"Although a contraction in Q4 leaves the UK on the edge of an unprecedented triple dip recession, our UK economics team thinks that some rebound in both of the above sectors and a post-Olympic hangover rise in services makes two quarters of contraction unlikely," they added.
Investors will also look towards a retail survey by the Confederation of British Industry at 1100 GMT, which is expected to post a positive balance in December.
Ten-year gilt yields fell nearly 2 basis points to 1.97 percent, while their spread with Bund yields was broadly steady at nearly 45 basis points.
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