Gilts tick down ahead of UK services PMI

LONDON: British government bonds inched lower early on Tuesday ahead of a survey that is expected to show a slower pace of contraction in the dominant services sector as investors fret about a new economic recession.

The January purchasing managers' index (PMI) reading at 0928 GMT is expected to be 49.5, showing a rise in activity compared with December's 48.9 but still below the 50 mark that separates expansion from contraction.

Britain's economy contracted in the final quarter of 2012 and investors are concerned it has slipped into its third recession in four years after just one quarter of growth.

"Today's services PMI outcome is likely to provide a domestic interest," said Lloyds strategists in a note.

"Our UK economics team look for a rebound back into expansionary territory, although snow-related disruption does add some uncertainty to the mix around this key release."

At 0857 GMT, the March gilt future was 12 ticks lower at 116.26, broadly in line with the equivalent German Bund future.

Bunds paused for breath after renewed worries in the euro zone spurred the contract's biggest daily rise since December in the previous session.

Later this session, Britain's Debt Management Office will sell 2024 index-linked gilts with a coupon of 0.125 percent.

"Index-linked gilts have performed strongly ahead of this auction," said Citi strategist Jamie Searle.

"The record low level of real yields is likely to deter demand, but the auction is small in size and ... offers relative value on the curve," he added.

An overnight release showing British retail sales rose strongly in January provided additional background pressure on gilts.

Ten-year gilt yields rose 3 basis points at 2.11 percent, while their spread versus Bunds was about 1 basis point wider at 48 basis points.