Gilts track Bunds lower ahead of PMI, credit data

LONDON: British government bonds tracked German debt lower ahead of manufacturing data and Bank of England lending figures on Monday, with sentiment on stock markets helped by an audit of Spain's ailing banks on Friday that was better than some had feared.

December gilt futures were 36 ticks down on the day at 120.26 at 0750 GMT, broadly in line with a 44-tick drop for the equivalent Bund, having touched their lowest level since September 26 earlier in the session.

Ten-year gilt yields were 2 basis points higher at 1.75 percent, but their spread over Bunds was little changed from levels seen late on Friday at just under 28 basis points.

"This week should see some upward pressure on yields in expectations of a Spanish aid request sooner rather than later as the budget reforms are out of the way," Lloyds strategists said in a note to clients.

An independent audit of Spanish banks released late on Friday showed a 59.3 billion euro ($76.3 billion) capital shortfall in the event of a serious economic downturn.

 Markets were expecting a 60 billion euro shortfall but there had been concerns it could be far higher and the result was welcomed by the IMF, European Commission and European Central Bank - which is on standby to buy the bonds of struggling sovereign issuers provided they ask for aid.

Traders, however, said the relief for Spanish bonds was likely to be short-lived given uncertainty over when Madrid would seek aid to activate the ECB scheme.

 Of more immediate interest to British government bond traders will be two major pieces of economic data due at 0828 GMT and 0830 GMT.

 First is the Markit survey of manufacturing purchasing managers (PMI), which is forecast to show a further small fall in factory activity, followed by the Bank of England's August mortgage approvals and lending data.

Economists will be watching the latter closely for signs of whether the BoE's Funding for Lending Scheme is boosting the availability of mortgages - something that was suggested in the BoE's credit conditions survey of banks last week.

If the FLS is successful, it may reduce the need for the BoE to purchase gilts as part of its quantitative easing policy, some members of the BoE's Monetary Policy Committee have said.