Gilts propped up by Italy vote worries, lag Bunds before supply

LONDON: British government bonds drew support on Monday from worries over elections in Italy, although they lagged a bigger rise in German debt as traders tried to cheapen gilts before a sale.

Investors were also growing nervous ahead of a half-yearly budget statement by British finance minister George Osborne due next month, which is likely to highlight the strained state of the country's finances.

The UK Debt Management Office will sell a 2052 index-linked bond next week in the last syndication of the 2012-13 financial year. It needs to raise around 3.8 billion pounds ($5.9 billion) to meet the DMO's target for funding via syndication this year.

"Throughout the whole week, I suspect, the UK is going to lag somewhat, just as a concession into what is major supply," said Morgan Stanley strategist Anthony O'Brien. "Every week, we are getting closer to the budget and possible (credit rating) downgrades."

March gilt futures settled 7 ticks up at 115.33, while Bunds ended 42 ticks higher on the day.

Safe-haven assets were underpinned by the risk that Italy's Feb. 24-25 national election could create a fragmented parliament and hamper the future government's reform efforts.

Ten-year gilt yields were steady at 2.195 percent, with their spread versus equivalent Bund yields 2 basis points wider at 56 basis points.

Gilts with maturities of 20 years and longer slightly underperformed shorter-dated debt, pressured by comments from Bank of England policymaker Martin Weale, who said on Saturday that sterling might need to weaken further to rebalance Britain's economy.

"That's the reason for the (yield) curve to steepen. You just worry about inflationary expectations in the long run," O'Brien said.

Otherwise, trade was quiet, with US markets closed for a public holiday.