LONDON: British gilts rose on Wednesday, broadly in line with Bunds, with markets wary before a bond sale in heavily indebted Italy on Thursday in holiday-thinned markets.
In the absence of any major British economic data, an auction of short-dated Italian debt already attracted the bulk of investors' attention during in the session.
Italy sold 9 billion euros of six-month debt at a yield of 3.25 percent -- just half the euro-era record high yield it had to pay in November. It also sold 1.7 billion euros of 24-month, zero-coupon bonds at a yield of 4.85 percent, down from 7.8 percent a month ago.
"It went pretty well," Sam Hill, strategist at RBC Capital Markets, said of the auction. "It's a reasonably positive sentiment."
The March gilt future settled 25 ticks up at 116.51, in line with the equivalent Bund. Gilts traded in a narrow range for most of the session, with volumes a fraction of their normal levels.
"I think it's just so quiet that reading anything into gilts is over-analysing it," Hill said.
The yield on 10-year gilts was 2.5 basis points down at 2.013 percent, within sight of an all-time low of 1.997 percent hit on Friday in the wake of data that suggested Britain may be entering a recession.
Hill said the main focus for investors on Thursday will be Italy's sale of up to 8.5 billion euros of longer-term bonds, including three- and 10-year paper, in what analysts said would be a tougher test of market sentiment.
The Italian 10-year benchmark yield was last a touch higher on the day at 7.05 percent, having fallen as low as 6.794 percent earlier. The two-year yield was still lower than the previous close, at 5.14 percent.
The 7 percent level is psychologically important as such borrowing costs have helped push other victims of the euro zone debt crisis into seeking bailouts. Investors may become increasingly nervous if yields rise further, especially as a wall of debt redemptions is approaching.
German inflation data, as well as US jobless figures, will also provide some cues for gilt investors about the health of the global economy.
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