Gilts eye BoE, tread water before U.S. GDP data

By David Milliken LONDON, Feb 28 (Reuters) - British government bonds held broadly steady on Thursday, with markets unwilling to re-test Wednesday's eight-week highs ahead of U.S. gross domestic product figures and German inflation data due later in the session. An inconclusive Italian election, which threatens to derail austerity measures needed to ensure market confidence in the country's debt, 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. 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. But market moves on Thursday itself were limited. The June gilt future was 5 ticks down at 116.76 at 1149 GMT, off a session low of 116.52 set earlier in the session. Ten-year yields were flat at 1.96 percent, not far from Wednesday's low of 1.926 percent, while gilts' spread over Bunds was a fraction wider on the day at 51 basis points. "Now we're in a strange kind of holding pattern on peripheral risk and Italy. For sure, U.S. data is the short-term key, but 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." Germany's February inflation data is due at 1300 GMT, followed by U.S. GDP data at 1330 GMT, which is forecast to be revised up to show 0.5 percent growth after an initial estimate of a 0.1 percent contraction. 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 116.76 (-0.05) * March short sterling 99.500 (-0.005) * June short sterling 99.54 (UNCH) * 10-year yield 1.96 percent (UNCH) --------------------- 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