LONDON: British gilt futures inched down in early trade on Friday, lagging Bunds for a second day after the ECB signalled it would not raise rates in June, and as investors booked profits from the recent rally. Producer prices data for April at 0830 GMT will provide a glimpse of the strength of pipeline inflation pressures in the UK, but the main focus for investors this session will be US non-farm payrolls data at 1230 GMT
At 0727 GMT, the June gilt future was 10 ticks down at 120.07. lagging the equivalent Bund by around a quarter of a point.
In the cash market, the yield on ten-year gilts was nearly 2 basis points higher at 3.406 percent, widening the spread against Bunds by 2 basis points to 20 basis points.
The spread had tightened to a 2-year low below 7 basis points earlier this week, a level which traders said may have encouraged investors to start unwinding their long gilt positions.
"After the recent outperformance of gilts, and it was looking pretty stretched at 7 basis points, the market was due a correction and that's partly what we're seeing this morning," said a London-based trader. "And the fact we've got inflation data out today rather than output data can't help," he said. There was little market reaction to UK local election results that showed a poor performance by the Liberal Democrat party -- the junior partner in the Conservative-led coalition.
However, strategists said any signs of weakening within the coalition could weigh on the market if it raised doubts about the government's ability to stick to its debt-cutting goals.
"The outcome of "Super Thursday's" electoral events may well conform to prior expectations, but any sense that the results are adding to tensions within the coalition will serve to heighten risk around sterling product after what has been a stellar run," said strategists at Lloyds Corporate Markets in a note.
"We have previously highlighted what we perceive to be increasing fiscal risk premium as a function of a softening GDP profile. After seeing the tide turn rapidly in respect of BoE pricing, a similar pattern could well emerge on this front on signs of further macro slippage.
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