Gilts hit 8-week high on talk of more QE, weak UK services

By Li-mei Hoang LONDON, Feb 27 (Reuters) - British ten-year debt hit an eight-week high on Wednesday after a Bank of England policymaker said more government bond purchases over a longer period than before may be needed to help the UK's sluggish economy. Official data showing that output in the nation's dominant service sector shrank 0.4 percent in December compared with November added to background support for gilts, as it pointed to continued economic weakness in the first quarter of this year. "The weaker data just makes you have conviction of your bullishness at the front end," said RBS strategist Andrew Roberts. "It does obviously take away some of your inflation fear (and) it makes it even more imperative that you get even easier policy." The March gilt future settled 37 ticks higher at 117.81, after hitting a fresh eight-week high of 118.04 earlier in the session, while the equivalent Bund future settled 19 ticks higher. But trading volumes in March gilt futures were light, as investors moved into the June contract. Bank of England policymaker Paul Fisher, who this month voted for a resumption of bond-buying quantitative easing by the bank, said late on Tuesday that the 25 billion-pound ($37.8 billion) top-up he supported might need to be the first in a series of new purchases. "Arguably, his comments about a possibly extended progamme of purchases is something the gilt market is taking into account for its slight outperformance," said RBC Capital Markets strategist Sam Hill. Earlier on Tuesday, BoE deputy governor Paul Tucker said he was open to more bond purchases, but that "sound money" was his priority, and that much of the effect of existing purchases was still to be felt. Otherwise, gilts were largely unmoved by data confirming that Britain's economy contracted by 0.3 percent in the last quarter of 2012 as first estimated, although yearly growth was revised up. Ten-year gilt yields fell 5 basis points on the day to 1.95 percent, having touched an eight-week low of 1.926 percent earlier in the session, while their spread versus equivalent Bund yields was 5 basis points tighter at 50 basis points. Later in the week, investors will look towards Britain's manufacturing PMI which economists polled by Reuters expect to show a modest rise to 51.0 in February. * March gilt future 117.81 (+0.37) * March short sterling 99.505 (+0.005) * June short sterling 99.54 (+0.01) * 10-year yield 1.95 percent (-5 bps) --------------------- KEY MARKET DATA--------------------------- Long Gilt futures Gilt benchmark chain Short Stg futures Cash market quotes Deposit rates Sterling cross rates UK debt speedguide --------------------KEY MARKET REPORTS-------------------------- Gilts Sterling Euro Debt Dollar U.S. Treasuries Debt reports -------------------- GILT STRIPS DATA -------------------------- Gilt strips data All gilt strips Gilt strips IO Gilt strips PO A list of all the strippable British gilts