LONDON: Gilts fell less than Bunds on Tuesday, benefitting from news of slower British inflation, while Germany's debt was pressured by an improvement in the country's business sentiment.
Gilts pared losses slightly and the spread between 10-year British and German bonds tightened after data showed that British consumer price inflation eased in July.
By 1108 GMT the differential stood at 76 basis points, down from 77 basis points just before the inflation release and a touch narrower on the day.
September gilt futures were 69 ticks lower at 110.83, while Bunds were 90 ticks down, after Germany's strong ZEW index suggested that the euro zone's economic recovery was accelerating.
Overall, gilts followed German debt as investors expected Wednesday's labour data to provide a better indication on British interest rates than the inflation numbers.
Last week the Bank of England pledged to keep its main interest rate at a record-low 0.5 percent until unemployment falls to 7 percent.
"What really matters becomes the labour market data," said Moyeen Islam, strategist at Barclays.
He also noted the rise in market interest rate expectations in recent weeks, particularly four to five years ahead, driven by signs of a strengthening in Britain's economy.
Overnight indexed swaps are pricing the first UK interest rate hike in late 2015, a year earlier than suggested by the central bank in its forward guidance on monetary policy.
Islam said the bank might want to bring market interest rates in line with its guidance by buying another 25 billion pounds ($38.7 billion) of gilts, although that was not something he was expecting for the time being.
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