Economic data next week are likely to provide a positive backdrop for British government bonds, although analysts suspect gilts might struggle to push further ahead after this week's strong rally. A dovish Bank of England Inflation Report and spill-over demand from Bunds following weak growth data in Europe helped to knock 10-year yields down to seven-month lows this week, and pushed December short sterling to a new contract high.
Analysts said this means gilts may be vulnerable to a modest correction, not least because the market will also have to make room for 3.5 billion pounds of fresh six-year gilt supply.
Economists polled by Reuters expect consumer price inflation to pick up slightly on the back of rising oil prices, but remain generally tame. Retail sales growth is expected to be flat after a strong gain in September.
Both sets of data are seen likely to deter any further Bank of England rate rise, boosting gilts.
The market will also take its cue from minutes of the BoE Monetary Policy Committee's November meeting, set to be published on Wednesday.
Economists polled by Reuters predict the MPC voted 9-0 to keep interest rates unchanged at 4.75 percent. If so, it would be the seventh consecutive unanimous vote.
Disagreement on the MPC could easily provide investors with an excuse to sell gilts and short sterling futures. But that would not be likely to alter the widely-held perception formed this week after the Inflation Report that the BoE is probably done with raising interest rates.
The Debt Management Office will sell a new issue of 3.5 billion pounds worth of 4.75 percent 2010 gilts on Thursday.
Yields of 6.25 percent 2010 gilts fell by around 10 basis points in the past week to 4.64 percent as the market reckoned interest rates are not likely to rise further in this cycle.
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