LONDON: The difference in returns between benchmark British government bonds and those of equivalent German debt fell to its narrowest in nearly five months on Friday after a survey suggested Britain's economy slowed in early 2017.
The spread between 10-year British and German government bonds stood at 86.6 basis points, down around 3 basis points on the day.
That was the narrowest gap since early October, before investors started to bet on the possibility of an interest rate hike by the Bank of England because of the unexpected strength of Britain's economy despite the Brexit vote in June.
An increase in German yields helped by rising euro zone inflation and easing jitters around the French presidential election further narrowed the gap between gilt and Bund yields.
Earlier on Friday, the Markit/CIPS UK Services Purchasing Managers' Index fell to its lowest level since September, hurt by slower consumer spending as the fall in the value of the pound since the European Union referendum pushed up inflation.
"In an environment of slowing growth and uncertainty, we continue to think the Bank of England will be on hold for the rest of the year," Simon Wells, an economist with HSBC, said.
"This is despite rising inflation, which the Monetary Policy Committee can 'look through' given it is largely the result of commodity price rises and a fall in sterling."
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