LONDON: British government bonds fell on Wednesday as investors, reluctant to take big positions ahead of the Bank of England Inflation Report, traded cautiously in early trade.
Bank of England Governor Mervyn King's comments on the latest inflation report at 1030 GMT, will be the central focus for gilt investors seeking more clarity on the government's decision last week to take profits from the BoE's bond buys and put them in the finance ministry's coffers.
King agreed to a finance ministry decision to take back 35 billion pounds ($56 billion) in interest paid to the BoE over the past three years on its 375 billion pound holdings of government bonds, bought as part of its quantitative easing (QE)stimulus policy.
"The market must expect a slightly less dovish outlook given that the MPC did not extend QE at the last meeting," Lloyds strategists said in a note.
"But this is still unlikely to mean any increase in growth expectations, even if the inflation picture is a little more elevated, so probably more important will be any press conference indication about the chances of further QE," they added.
At 0836 GMT, the December gilt future was 18 ticks lower at 120.46, underperforming the equivalent Bund which was 6 ticks higher on the day.
Markets will also focus on British unemployment data at 0930 GMT, for clues on whether the economy is improving following GDP data last month which showed 1 percent growth for the third quarter.
Ten-year gilt yields rose 2 basis points to 1.73 percent, and their spread versus Bund yields widened by 1 basis point to 38 basis points.
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