European shares extended falls on trader talk that a short-selling ban may be imposed in Germany after the market close. They had earlier pared gains after data showed US jobless claims rose more than expected last week, reviving worries over the health of the world's biggest economy.
"We are yo-yoing in line with equity markets," said Marc Ostwald, strategist at Monument Securities.
The September gilt future -- which serves as a proxy for benchmark 10-year gilts -- settled 35 ticks up on the day at 128.97, slightly outperforming the equivalent German contract .
Bank of England policymaker Martin Weale said the central bank could hold fire on further monetary stimulus despite economic weakness and recent market turmoil as the overall picture still looked better than it was in the run-up to the financial crisis.
However, he added that the BoE was still in a position to support the economy with further asset purchases, or quantitative easing (QE), should inflation look set to fall too far below target, as yields at the longer end of the market were not at historically low levels.
"So Weale says that there would be scope for further asset purchases to trigger further reduction in yields on gilts should the need arise," said Sam Hill, strategist at RBC Capital Markets.
"There is the potential for some market participants to infer that if there were to be another round of QE, it would be more concentrated in the longer end of the gilt market.
"If it was to be a theme that gathered momentum it would offset some of the relative weakness in the performance of long gilts on the curve."
Hill's views chimed with analysts at 4cast consultancy.
"It does increase the odds of a change in the 10s/30s dynamic if yields fall further -- from steepening to flattening. This did in fact happen -- in a very small way -- suggesting that, although we did not see the flow, there were some prepared to read this bullish message in Weale's speech," they said in a note.
Ten-year gilt yields were steady on the day at 2.47 percent, while 30-year yields were 3 basis points down at 3.77 percent.
The yield premium for holding gilts over Bunds was down 2 basis points on the day at around 28 basis points.
Investors are awaiting a key speech by US Federal Reserve Chairman Ben Bernanke on Friday, with some hoping he will signal measures to support the struggling US economy.
Friday will also see the release of a second estimate of UK second-quarter GDP, as well as an August consumer sentiment survey and another look at second-quarter GDP for the United States.
Copyright Reuters, 2011