LONDON: Gilt futures settled a few ticks higher on Monday, after Greek opinion polls placed pro-bailout parties in the lead to win next month's election, tempering the impact of news that Spain has proposed putting sovereign debt into struggling lender Bankia.
Spain may shore up Bankia with sovereign bonds in return for shares in the bank and could use this method to prop up other troubled lenders, government sources told Reuters, in moves that would push the country's debt above the 79.8 percent of economic output that had been expected this year.
Analysts cautioned against reading too much into price moves this session as trading volumes were muted by a public holiday in the United States and many European countries. A raft of economic data due on Friday also probably encouraged investors to wait on the sidelines.
The June gilt future settled 7 ticks up at 119.66, underperforming the equivalent Bund by 7 ticks.
In the cash market, the yield on 10-year gilts was almost 1 basis point higher at 1.759 percent, widening the spread against Bunds to around 40 basis points.
"On the one hand we have this risk-on tone after the (Greek) opinion polls, but to my mind, along with the fact that the Spanish banking system's in deep trouble, it's a bit of a mixed message," said Sam Hill, strategist at RBC.
"On a day when a number of the markets are closed, there's a lot less activity."
Interpreting price action on the British government bond curve was further complicated by the June gilt futures contract rolling into the September contract, a process that is likely to be completed this week.
Gilts shrugged off a speech by Bank of England policymaker Ben Broadbent, who said that Britain's economic fate was largely in the hands of policymakers elsewhere in Europe, but the central bank stood ready to intervene if the euro zone debt crisis spiralled out of control.
Broadbent did not discuss the outlook for BoE monetary policy in depth.
Britain's Debt Management Office is due to hold a syndicated sale of inflation-proof gilts due 2062 this week, most likely on Tuesday.
"I think the fact that linkers have struggled to participate in the rally that we've had in conventionals over the last few sessions means a cheapening-up has taken place, and there should be some interest to switch up the real yield curve into the syndication," said RBC's Hill.
Strategists reckon the DMO will be able to sell 3 to 4 billion pounds of the bonds via the syndicated deal, lead-managed by Barclays Capital, Credit Suisse, HSBC and UBS.
"There is also natural demand from real-money investors in that sector, so it should be well-received," said Vatsala Datta, strategist at Lloyds Bank WBM.
BNP Paribas analysts also predicted strong appetite for the bonds: "In the absence of ultra-linker supply since February, the UKTi-62 syndication should provide an eagerly awaited liquidity window."
Early on Tuesday the DMO is also due to publish minutes of a meeting with market makers and investors discussing its issuance plans for the July-September quarter.