LONDON: Gilts rose modestly on Friday after weaker-than-expected British retail sales figures dampened appetite for riskier assets, in thin pre-weekend trading.
Gilts fell at the start of the session on upbeat Chinese output data, then rallied to a session high after British retail sales unexpectedly fell in December, dashing hopes of a boost to an economy on the verge of another contraction.
"The market did react to it, we did see a spike to session highs," said John Wraith, fixed income strategist at BofA Merrill Lynch Global Research.
"We've edged back down since then, which I think is probably right and there doesn't seem to be anything else on the horizon today so I suppose we'll drift into the weekend with yields pretty much unchanged on the day which broadly speaking are a little bit lower on the week," he added.
At 1247 GMT, the March gilt future was 3 ticks higher at 116.76, just off its peak of 116.86, slightly underperforming the equivalent Bund future.
There was little immediate reaction to a speech from new Bank of England Monetary Policy Committee member Ian McCafferty, in which he said now was not a good time to try to boost the economy with further gilt purchases.
Most economists already doubt the BoE will restart its programme of gilt purchases, unless Britain's weak economy deteriorates much more sharply.
Ten-year gilt yields were steady at 2.04 percent and prices were broadly steady versus 10-year Bunds.
The benchmark 10-year Bund used in Reuters' spread calculations changed overnight to the 1.5 percent February 2023 Bund, leaving the spread between gilts and Bunds at 44 basis points, compared to 50 basis points on the previous benchmark.
Most of that tightening was due to the change in the benchmark rather than an underlying narrowing in the spread, and Wraith played down the prospects of both gilt underperformance and a broader fall in core government bonds.
"Regardless of the spike in risk assets, we've got a lot difficult stuff to negotiate still and growth is elusive and patchy at best everywhere.
So it is unlikely that that sell-off at the start of the year marks the beginning of the big rise towards higher yields that a lot of people are expecting to happen," said Wraith.
"I think that we are settling into a new range really, for the time being, which is going to be somewhat higher that the range that we traded in the second half of the year. But still, by historic standards, yields are going to stay pretty low for the time being."
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