Bonds: Gilts gain ground, Italian BTPs hit technical resistance

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

US: 2.50% (+0bp)
UK: 1.19% (-2bp)
Germany: 0.32% (-2bp)
France: 0.96% (+0bp)
Spain: 1.74% (+1bp)
Italy: 2.19% (+3bp)
Portugal: 3.97% (+1bp)
Greece: 7.21% (+12bp)
Japan: 0.08% (+0bp)

Longer-term Gilts gained ground amid weaker then expected readings on High Street sales and home prices and some jitters regarding euro area periphery debt.

Like-for-like retail sales dipped by 0.4% year-on-year in February according to the British Retail Consortium.

The figures, which fell short of the 0.2% rise economists had penciled in, stoked worries that higher inflation on the back of a weaker pound was beginning to filtre through into consumer spend.

That came as the pound dropped in markets amid higher rate expectations across the Pond and - just maybe - also amid shifting expectations for the European Central Bank.

However, some analysts, such as those at Morgan Stanley, were in fact expecting to see cable, as traders call the currency cross between Sterling and the Greenback, rise back towards 1.28 by year-end 2017 and 1.45 by the close of 2018.

On a more cautious note, Jonathan Loynes, chief economist at Capital Economics added: "Of course, the pound could yet fall further. Indeed, the previous relationship with expected interest rates suggests that it might fall to $1.10 or below. However, if we are right in expecting the economy to remain resilient, interest rate expectations could soon rise again.

"[...] Accordingly, we are sticking to our forecast that the pound will end the year just a touch weaker against the US dollar at around $1.20 and rise against the euro as slowing growth and political pressures in Europe weaken the single currency."

Acting as a backdrop, some market commentary highlighted on Tuesday how futures for similarly-dated Italian BTPs were now to be seen smack up against a downward trendline and near their 100-day moving average.

Hence, euro area periphery political risk had yet to be completely exorcised.

On the subject of the ECB, Andrew Bosomworth, head of PIMCO portfolio management in Germany, made the case for the central bank to keep winding down its policy support.

Bosomworth said: "There is a strong case for the ECB to continue tapering its QE programme, to alter its forward guidance and to begin normalising policy rates. While these changes will tend to tighten financial conditions, this risk is outweighed by the growing risks to the region’s financial stability.

Economists at Barclays Research were more measured in their stance, telling clients on 3 March: "We do not expect any policy changes at the March ECB meeting, but the GC is likely to point to a more balanced risk regarding the macroeconomic scenario and inflation outlook. The Q&A may focus on the improved macro outlook and the possible next steps towards a less ultra-accommodative monetary policy stance."