UK gilts fall as market absorbs linker syndication, liquidity thin

LONDON, Feb 23 (Reuters) - British government bonds fell on Tuesday, underperforming their euro zone counterparts as the government sold inflation-linked bonds and concerns about a possible British exit from the European Union kept some investors on the sidelines.

Gilt futures were down 29 ticks at 121.80, having fallen nearly a full point earlier to as low as 121.14.

They extended Monday's losses when investors sold bonds on concerns about London mayor Boris Johnson's decision to back a British exit from the European Union after the government set June 23 as the date for the vote.

"We had a syndication earlier on today, so it could just be some hedges being unwound on the back of that," John Wraith, rate strategist at UBS (NYSEArca: FBGX - news) said, adding that thin liquidity, particularly in recent days, was exacerbating the moves.

"Nobody has got a strong conviction at the moment in any market and certainly in the UK, with this focus on the EU referendum. It's making people want to avoid excessive amounts of risk because there is no clarity over where things may be heading next potentially."

Britain's debt agency sold via syndication 2.75 billion pounds of 0.125 percent index-linked 2065 gilts, attracting orders worth 10.5 billion pounds and pricing the offer at the tight end of the published guidance.

Ten-year yields rose 3.2 basis points to 1.43 percent, pushing the yield gap with equivalent German yields up 3 basis points on the day to 125 bps.

Two-year yields were little changed at 0.35 percent.

Marc Ostwald, fixed income strategist at ADM Investor Services said comments from Bank of England Governor Mark Carney that the BoE (Shenzhen: 000725.SZ - news) had "considerable room" to stimulate the economy had added to the underperformance of long-dated gilts relative to short-dated ones.

The market had expected Carney to reinforce Deputy Governor Jon Cunliffe's message last week that market moves signalling interest rate hike only by the end of the decade were unwarranted, Ostwald said.

"He was expected to be leaning against what the market has got priced in at the moment, in terms of a rate view. He was expected to lean against that a lot more than he did," he said.

March long gilt future 121.80 (-0.29)

June 2016 short sterling 99.39 (unch)

Dec (Shanghai: 600875.SS - news) 2016 short sterling 99.38 (-0.01)

10-year gilt yield 1.43 pct (+3.2 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 (Other OTC: UBGXF - news) . Treasuries Debt reports --------------------GILT STRIPS DATA ------------------------- Gilt strips data All gilt strips Gilt strips IO Gilt strips PO

(Reporting by Ana Nicolaci da Costa; Editing by Richard Balmforth)