LONDON: British government bonds drifted lower on Thursday as the market reverted to the usual thin August trading after the past week's sharp swings on speculation about future Bank of England and European Central Bank moves.
At 1111 GMT, the September gilt future was 4 ticks down at 120.75, and has spent the session stuck within a narrow 30-tick trading range with a modest 40,000 contracts traded.
"There's not a lot going on and the market is mostly moving in line with Germany," said Shahid Ladha, fixed income strategist at BNP Paribas.
The gilt future closely tracked moves in the Bund contract on Thursday after heavily lagging it on Wednesday, when comments from BoE Governor Mervyn King doused hopes of extra stimulus before November. The market traded 116,000 contracts over the full day on Wednesday and 141,000 on Tuesday.
On Thursday, short-dated gilts continued to underperform longer-dated, in an extension of Wednesday's move, which was due to King's renewed scepticism about the merits of a possible cut to the Bank of England's record-low 0.5 percent interest rate.
King signalled that any further help from the central bank would come via more quantitative easing -- asset purchases with newly created money -- rather than a cut in interest rates from 0.50 percent, saying a reduction could be counterproductive.
But he also said the BoE's inflation forecast did not suggest an urgent need for further action.
Ten-year gilt yields were 1 basis point higher at 1.58 percent, but their spread against Bunds was flat at 15 basis points, after widening 4 basis points on Wednesday as the prospect of an immediate boost to BoE gilt purchases diminished.
However, Ladha said he expected the spread to tighten again as gilt issuance remains limited in coming weeks while the BoE is buying 3 billion pounds of gilts a week as part of the 50 billion pound gilt purchase programme it decided on in July.
The UK Debt Management Office sold 1.5 billion pounds of September 2014 gilts on Thursday at a yield of just 0.136 percent, a record low for a conventional gilt.
The mini-tender -- a small-scale single-price auction used by the DMO to tackle hotspots of market demand -- attracted a high bid-to-cover ratio of 3.42, and Ladha said the gilt looked dear.
Before the sale, Monument Securities strategist Marc Ostwald said it should be viewed primarily a market management exercise to provide a bond needed by banks for collateral purposes.
There was no market reaction to Britain's June trade data that showed a record deficit after a sharp drop in goods exports, confirming the bleak picture painted by an early estimate of second-quarter gross domestic product last month.
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