Gilts drift lower as focus shifts to services PMI, BoE decision

By Li-mei Hoang LONDON, March 4 (Reuters) - British government bonds fell back from a two-month high on Monday, with uncertainty about looming services data dulling the impact of a sharp drop in construction activity and shrinking bank lending. Recent gains in lower-risk gilts have been driven by a mix of concern about the future of the euro zone after Italy's inconclusive election and speculation that the Bank of England may restart its programme of bond purchases this week. But a strong reading from Tuesday's services purchasing managers' index could sway the central bank's finely balanced decision. Ten-year gilt yields brushed a low of 1.862 percent as prices edged up first thing on Monday, taking the yield to a level last seen on Dec. 31. However, investors proved unwilling to sustain these prices in the run-up to the sale of 4 billion pounds ($6.0 billion) of a new 1.25 percent 2018 gilt on Tuesday and the services data that may swing the Bank of England's policy decision on Thursday. The 10-year gilt yield finished the day 4 basis points higher at 1.91 percent, and its spread versus Bunds widened by 3 basis points to 49 basis points, moving away from Friday's one-month low. "If we do see another set of weak data tomorrow, then that raises the probability of further gilt purchases being announced on Thursday," said Royal Bank of Scotland strategist Simon Peck. The June gilt future settled 26 ticks lower at 117.22, underperforming the equivalent Bund future which ended the day unchanged at 143.67. Earlier in the session, gilts had risen after data from the Bank of England showed banks cut their lending sharply in the last three months, another setback for hopes that the economy can get back to growth quickly. The central bank announced the Funding for Lending Scheme jointly with the government in June 2012, as a way to unblock a credit log-jam which some economists say is a big factor behind Britain's weak economic recovery. Gilts were also aided by a survey showing output in the UK construction sector fell in February at the fastest pace in more than three years despite a rare pick-up in house building. But attention remained focused on data for the services sector, which dominates Britain's economy. Economists expect the services PMI to fall to 51.0 in February from 51.5 in January, showing only weak growth in the sector. * March gilt future 117.22 (-0.26) * June short sterling 99.54 (-0.025) * Sept short sterling 99.57 (-0.025) * 10-year yield 1.91 percent (+4 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