LONDON: British government bonds reversed early losses after a strong German debt sale that boosted investor appetite for safe-haven assets, which had been hit by a rise in share prices after a positive start to the US earnings season.
The March gilt future was 5 ticks up on the day at 116.91 at 1243 GMT, well off a session low of 116.60 hit earlier, though underperforming a 21-tick rise in the equivalent Bund.
Ten-year gilt yields were 1 basis point lower at 2.02 percent, keeping well clear of last week's eight-month peak of 2.139 percent, while their spread over Bunds was a shade wider on the day at just under 55 basis points.
Investors bought 4.1 billion euros ($5.36 billion) of a new 0.5 percent five-year German bond, with strategists citing strong demand due to a recent rise in yields after the United States boosted economic confidence by reaching a budget deal at the turn of the year.
Analysts predicted a quiet day for the gilt market, with moves likely to be largely driven by external factors.
"To me it is US Treasuries that are the key here," said Sam Hill, gilts strategist at RBC Capital Markets, pointing to their break in yields last week above 1.87 percent, a high for much of 2012.
"There was the prospect of a more significant bearish move in core markets which gilts would have been subject to ... but with Treasuries having stabilised, arguably the technical picture is a bit in limbo," he said.
US 10-year yields were hovering just over 1.87 percent on Wednesday, while British share prices were 0.5 percent higher, limiting gilts' gains.
There was little reaction to data that showed a modest narrowing in Britain's goods trade deficit in November, nor to figures overnight showing a stable picture for high street inflation and rising job vacancies.
Instead, attention is turning to a statistics office announcement due at 0700 GMT on Thursday setting out proposals to change the retail price index (RPI) measure of inflation used to calculate payments to holders of index-linked gilts.
The move is likely to lower the RPI rate, bringing it closer to CPI and denting demand for longer-dated index-linked gilts in particular, strategists at Lloyds predicted.
"This makes us believe that material downside risks exist for UK (index-linked gilts) going into the announcement and in its aftermath," they wrote in a note to clients.
The Bank of England and European Central Bank both announce monetary policy decisions on Thursday as well. Economists do not expect either to change stance.
Center>Copyright Reuters, 2013
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