LONDON: British government bond prices rallied on Tuesday after data showed inflation fell more sharply than expected last month, potentially giving the Bank of England greater scope to resume gilt purchases.
Consumer price inflation sank to 2.4 percent from 2.8 percent, its first fall since September, though it is still above the central bank's target and is likely to rise again in coming months.
Ten-year gilt yields fell 4 basis points on the day to 1.88 percent, outperforming German debt by 3 basis points and taking the spread over Bunds to its tightest in 10 days at just over 51 basis points.
"Gilts have been under the cosh a bit, so any bullish data will be seized on to lead a bit of a reversal of the weakness we've seen recently," said John Wraith, fixed income strategist at Bank of America Merrill Lynch.
June gilt futures were 22 ticks higher at 117.82 at 1128 GMT, outperforming flat Bund futures.
Wraith said the fall in inflation kept alive the prospect of more asset purchases after new BoE Governor Mark Carney arrives in July, though he doubted it would be imminent.
"More than for a while, bonds may settle down into a bit of range trading. We've seen a meaningful rise in yields but they are unlikely to go much higher until the Fed and other central banks are categorically finished with QE."
One factor weighing on longer-dated gilts is the prospect of 'super-long' issuance in the second half of June, when the UK Debt Management Office plans to issue the country's longest conventional gilt with a maturity of 50-60 years.
Minutes of a quarterly DMO meeting with investors published earlier on Tuesday suggested demand for a gilt with a 2068 or 2070 maturity, but Wraith said appetite could prove patchy.
"Clients are lukewarm," he said. "There is some demand for that paper but it's not something the market is crying out for."
The unprecedented super-long issuance appeared driven by a desire from Britain's Conservative-led coalition for a tangible symbol of market confidence in its deficit-reduction strategy, rather than meeting investor needs, Wraith added.
"It may be a very long time before (a super-long gilt) builds up to liquid size, and it risks becoming a bit of an anomaly at the end of the yield curve," he said.
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