Ten-year gilt yields fall to 5-week low before UK Budget

By David Milliken

LONDON, March 18 (Reuters) - Yields on 10-year British government bonds fell to their lowest in more than a month on Wednesday after the release of weak wage growth data and ahead of finance minister George Osborne's final pre-election budget.

Minutes from the Bank of England also caused markets to nudge back their expectations of when interest rates will start to rise, after the central bank said sterling could strengthen further on a trade-weighted basis, causing inflation to undershoot its target for longer.

Ten-year gilt yields fell to a low of 1.604 percent, 8 basis points down on the day, at 1049 GMT, a level last seen on Feb. 9, as bond prices rallied following news that annual wage growth had slowed to 1.8 percent in January from 2.2 percent in late 2014.

Gilts outperformed German Bunds on the news, with the yield spread between 10-year gilts and Bunds tightening by as much as 5 basis points to 135.2 basis points, its lowest since Feb. 25.

"It's looking fairly perky," said Jason Simpson, UK rates strategist at Societe Generale (Paris: FR0000130809 - news) . "I think the move is a little bit exaggerated on the back of not a lot of flow, as we have the Budget this afternoon and the FOMC tonight," he said, referring to a post-meeting statement from the U.S. Federal Reserve.

Osborne will reveal new government budget forecasts in his budget starting at 1230 GMT, and immediately after the UK Debt Management Office will set out its gilt issuance plans for the 2015/16 financial year.

Strategists polled by Reuters on Tuesday said they expected the DMO to raise its issuance target to 147 billion pounds ($215.50 billion) from 125.9 billion pounds.

Although underlying government borrowing is forecast to fall next year, the amount of money Britain needs to raise from debt markets is set to increase after one-off cash inflows depressed cash borrowing needs in previous years.

June long gilt future 120.24 (+0.68)

June 2015 short sterling 99.42 (+0.01)

Dec (Shanghai: 600875.SS - news) 2015 short sterling 99.29 (+0.03)

10-year yield 1.61 pct (-8 bps)

-------------------KEY MARKET DATA--------------------------- Long Gilt futures Gilt benchmark chain Short Stg futures Cash market quotes Deposit rates Sterling cross rates UK debt speedguide -------------------KEY MARKET REPORTS-------------------------- Gilts Sterling Euro Debt Dollar U.S. Treasuries Debt reports --------------------GILT STRIPS DATA ------------------------- Gilt strips data All gilt strips Gilt strips IO Gilt strips PO ($1 = 0.6821 pounds) (Editing by Susan Fenton)