Bonds: Gilts underperform as Brexit uncertainty lifts slightly

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

US: 2.55% (+1bp)
UK: 1.34% (+3bp)
Germany: 0.58% (+0bp)
France: 0.85% (-1bp)
Spain: 1.50% (-4bp)
Italy: 1.98% (-7bp)
Portugal: 1.79% (-4bp)
Greece: 4.0% (+2bp)
Japan: 0.08% (+1bp)

Gilts continued to retreat following a report pointing to a friendlier outcome for the UK to the second phase of negotiations with Brussels than some had feared.

According to Bloomberg, the Spanish and Dutch finance heads had met earlier during week, agreeing to seek a soft Brexit deal, sending the pound vaulting higher to its best level since Brexit against the US dollar.

Stateside, focus was on the continued flattening of the government bond yield curve.

Stronger than expected readings on retail sales and consumer prices saw the yield on the two-year US government note rise by two basis points, hitting the 2.0% mark for the first time since later 2008, just after investment bank Lehman Brother filed for bankruptcy.

According to the Department of Commerce, retail sales volumes in the States rose by 0.4% month-on-month in December, which was a shade below the consensus expectation.

But that was more than compensated for by upwards revisions to previous months' data, which combined boosted Barclays' tracking estimate for fourth quarter gross domestic product from 2.6% to 3.0%.

Across the Channel, in the euro bloc, sovereign debt outside of Germany outperformed, helped along perhaps by news of a breakthrough in talks between the main German parties to form a grand coalition.

"It was a strong start of the year: supply in the eurozone amounted to €58bn, well above that of the last two years (€41bn). Demand proved to be very good for the periphery, underpinning investors' appetite for yield pickup. Italy issued a new 20Y bond and Portugal a new 10Y bond. Demand was very strong for both," said Dr. Luca Cazzulani at UniCredit Research.

"On the other hand, demand for the new 10Y Bund was weak, with the auction technically uncovered for the second time in a row. Demand at the Austrian auction was good."