LONDON: British gilt futures rallied to a contract high on Monday on fresh concerns about the euro zone debt crisis, and outperformed German government debt due to relatively limited gilt issuance scheduled for the remaining weeks of the fiscal year.
The June gilt future settled 60 ticks up on the day at 115.68, having hit a contract high of 115.84 at 1622 GMT. Gilts outperformed the equivalent Bund future by around 20 ticks.
"There is undoubtedly concern about the euro zone in broad terms, whether it's the implications of the credit default in Greece or the spat between the euro group and Spain over the budget," said Monument Securities fixed income strategist Marc Ostwald.
Protectionist election rhetoric from President Nicolas Sarkozy of France and signs that Italy was back-pedalling on labour market reform also raised doubts that the euro zone economy would grow enough to ease its debt burden, he added.
Ten-year gilt yields were more than 6 basis points down on the day at 2.091 percent, and the yield spread versus Bunds tightened by around 3 basis points on the day to 33.5 basis points.
"We don't have a lot of supply to the end of the fiscal year - it's typically light through the month of March - and you still have the BoE buying at a reasonably decent pace," said BNP Paribas gilts strategist Shahid Ladha.
Short-dated gilts underperformed 10-year gilts by around 3 basis points, despite a much lower number of offers at Monday's BoE buy back of 3-7 year gilts than the week before.
Gilts' performance has been helped by a winding-down of issuance as Britain comes to the end of its fiscal year, as well as weak industrial output data on Friday which raised concerns that the economy could be at risk of recession.
The only gilt supply this week is a 2 billion pound sale of 30-year gilts on Thursday, while the Bank of England will buy back 4.5 billion pounds of gilts in total this week.
BoE Monetary Policy Committee member Paul Fisher will deliver a speech in London on Monday evening which may give further clues on whether the central bank will conduct more quantitative easing in May. Housing and hiring surveys are due out overnight, and January trade data will be released at 0930 GMT on Tuesday.
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