LONDON: Gilts fell in early trade on Wednesday in line with Bunds on growing expectations that a U.S budget deal will soon be reached, boosting investor demand for riskier assets.
Hopes of an agreement rose this week after US President Barack Obama made a concession on tax, offering to limit tax increases to household incomes exceeding $400,000 - a higher threshold than the $250,000 he had sought earlier.
Anticipation of more aggressive monetary stimulus from the Bank of Japan after recent elections also set a negative tone for core government bond markets.
At 0846 GMT, the March gilt future was 14 ticks lower at 117.47, after hitting a contract low of 117.31 earlier in the session, broadly in line with the equivalent Bund which was 12 ticks lower.
"The negotiations on the (US) 'fiscal cliff' seem to be moving in the right direction, as there are signs of a political compromise and House (Republicans are) ... said to be working on a 'plan B' if all else fails by the deadline," said Lloyds strategists.
Ten-year gilt yields rose 1 basis point to 1.967 percent, with the spread over equivalent Bund yields broadly steady at 54 basis points.
Investors will look to the minutes of the Bank of England's latest policy meeting, expected at 0930 GMT, and a retail survey from the Confederation of British Industry.
"The MPC minutes are expected to see the same vote outcome as November," said Monument Securities strategist Marc Ostwald.
"The focus will clearly be on what hints they offer on the possibility of further QE in February, or whether the current strength of inflation and benign financial sector refinancing rates are deemed to advise caution, notwithstanding the likelihood that Q4 GDP will at best show a very marginal rise," he added.
Center>Copyright Reuters, 2012
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