Bonds: Gilts underperform as pound rallies; Spanish note sale sees record demand

These were the movements in some of the most widely-followed 10-year sovereign bond yields:

US: 2.73% (-6bp)

UK: 2.32% (+0bp)

Germany: 0.24% (-2bp)

France: 0.64% (-1bp)

Spain: 1.33% (-3bp)

Italy: 2.74% (-2bp)

Greece: 4.13% (-3bp)

Japan: 0.0% (-1bp)

Longer-term Gilts underperformed on Tuesday as Sterling continued to move towards its best levels in three months on increased optimism that at least a so-called 'hard Brexit' can be averted.

Overnight, a cross party amendment was tabled that would force the Prime Minister to extend Article 50 if the government was unable to garner sufficient support for her Brexit proposal.

Also boosting the pound was a bumper employment report for the month of November showing that the economy was at risk of overheating, Barclays Research said, albeit adding "if it weren't for slowing activity, dwindling confidence and lacklustre productivity in November."

"In the current environment, however, risks are that job creation makes up for lack of investment as business implement no-deal contingency plans," Barclays's Fabrice Montagné and Sreekala Kochugovindan added.

According to ONS, the UK unemployment rate dipped by a tenth of a percentage point in November, versus the prior month, to reach 4.0% (consensus: 4.1%), pushing the quarterly year-on-year pace of wage growth up by the same amount to 3.4% (consensus: 3.3%).

Separately, it was reported that public sector borrowing excluding public sector banks printed at £3.0bn for December, versus £2.7bn one year ago and a consensus forecast for £1.9bn.

A £1.5bn reduction in the surplus returning from the EU to the UK was the sole reason behind the year-on-year increase in borrowings, according to Samuel Tombs at Pantheon Macroeconomics.

Should the year-to-date trend remain in place, then borrowings over the whole fiscal year were set to climb to £30.7bn, which was ahead of the £25.5bn projected in the October budget, due to slower than anticipated growth in tax receipts.

Nevertheless, Tombs added that "the Chancellor still had fiscal headroom—his margin for error in meeting his 2020 borrowing target—of £15.4B in the Budget plans, so he can absorb a £5B borrowing overshoot without having to scrap the modest fiscal boost planned for 2019/20. Indeed, his large wriggle room implies that he should be able to ensure that fiscal policy is slightly stimulatory in 2020/21 too."

Acting as a backdrop, US Treasury yields were lower as investors returned after the long weekend to find mixed headlines around the US-China trade talks.

As an aside, in remarks at the World Economic Forum in Davos, Switzerland, the vice chairman of the China Securities Regulatory Commission, Fang Xinghai, said he did not believe that Beijing "will in any way significantly reduce its investment into the U.S. government bond market."

To take note of as well, the Spanish Treasury's sale of a new 10-year benchmark bond saw record demand of nearly €47bn, priced at 67 basis points above mid-swap, it fetched a bid-to-cover ratio of 4.7 times, the same as at the Belgian launch, better than at Ireland's, but below the 6.0 seen at Portugal's.