Gilts edge lower on partial recovery in Italy sentiment

By David Milliken LONDON, Feb 28 (Reuters) - British government bonds edged lower on Thursday, with markets unwilling to re-test Wednesday's eight-week highs as German debt moved down in the face of a rebound in Italian bond prices. Mixed U.S. data gave little direction to the market, as a fall in new claims for unemployment suggested a rosier start to the year, although fourth quarter economic output was revised up less than expected. An inconclusive Italian election, which threatens to derail austerity measures needed to ensure market confidence in the country's debt, had pushed 10-year gilt yields to an eight-week low on Wednesday, just days after Britain lost its triple-A credit rating with agency Moody's. But investors made a cautious move out of core European debt and back into Italian debt on Thursday - prompted by faith in European Central Bank bond purchases - and the June gilt future settled 12 ticks down at 116.69, towards the lower end of the day's narrow 33-tick trading range. Ten-year yields were 1 basis point higher at 1.97 percent, moving away from Wednesday's eight-week low of 1.926 percent, while gilts' spread over Bunds was just over 1 basis point wider on the day at 52 basis points. Gilt markets are also weighing the possibility of an increase in Bank of England asset purchases at next Thursday's policy meeting, and there is background support from coupon payments and limited issuance in coming weeks. "The market is almost entirely focused now on next week's BoE decision," said Mark Capleton, a fixed-income strategist at Bank of America Merrill Lynch. Analysts have seen a greater chance that the central bank will vote for more gilt purchases since February policy minutes unexpectedly showed that Governor Mervyn King voted in favour of a restart to stimulus. But policymakers have been considering other options too ahead of the arrival of Bank of Canada Governor Mark Carney, who will succeed King in July. "The market is very divided on whether we take past precedent ... which would suggest there's a small dollop of QE coming," Capleton said. "The alternative view - which we would hold to - is that ... the MPC are putting all options on the table to give the new governor a fairly free rein." There was no reaction to Britain's GfK consumer confidence data released overnight, showing morale stable at a low level , and the next major domestic figures are a manufacturing purchasing managers' survey and mortgage approvals data around 0930 GMT on Friday. * March gilt future 116.69 (-0.12) * June short sterling 99.54 (UNCH) * Sept short sterling 99.57 (+0.01) * 10-year yield 1.97 percent (+1 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