Gilts dragged down by Bunds as concerns over euro zone wane

LONDON: British government bonds dropped on Tuesday, following a fall in Bunds which were pressured by a recovery in Spanish and Italian debt and surprisingly upbeat euro zone data.

The March gilt future settled 29 ticks lower at 116.09 after ending the previous session little changed.

The equivalent German Bund future settled 44 ticks lower, erasing much of the gains made on Monday.

"It's just partially an unwind of yesterday's price action where there had been awful lot of concern about Spanish politics and the Italian elections," said RBC Capital Markets strategist Sam Hill.

Gilts briefly extended losses after a purchasing managers' survey showed an unexpected return to growth in Britain's dominant service sector in January, which reduced the risk of a triple-dip recession.

"Even though today's (services) number was better, the 12-month moving average was at its weakest level since late 2009, so it's still not great," said John Wraith, fixed-income strategist at BoFA Merrill Lynch Global Research.

Investors remained mostly focused on events beyond Britain's shores while they wait for the next Bank of England governor, Mark Carney, to appear before lawmakers on Thursday.

"There is a risk we get a bit carried away with how much we expect him to say," Hill said. "A lot of it could be within the more administrative realm than insight into paths for tightening or (QE) exit strategy."

Spanish and Italian bonds rebounded after a steep selloff in the previous session, signalling the start of what analysts expect will be a volatile period fuelled by political uncertainty.

The improved performance in riskier euro zone debt dampened demand for the safety and liquidity of German debt.

Signs of recovery in the euro zone PMI also took some shine off Bunds.

Early in the session, Britain's Debt Management Office sold 1.1 billion pounds ($1.73 billion) of 0.125 percent 2024 gilts at a record low yield of -0.844 percent.

Ten-year gilt yields rose 4 basis points to 2.12 percent, while their spread versus Bunds was about 1 basis point tighter at 46 basis points.