LONDON Gilts drifted higher on Thursday, in line with Bunds, as concern over the latest twist in heated U.S. budget talks dampened demand for riskier assets and data showed British retail sales slowed in November.
U.S. Republicans and Democrats had been drawing closer in the debate over how to avoid a 'fiscal cliff' of scheduled spending cuts and tax hikes in early 2013, suggesting a deal could be in the offing. But the Republicans then announced plans to put an alternative tax deal to a vote, which U.S. President Barack Obama has threatened to veto.
At 1210 GMT, the March gilt future was 19 ticks higher at 117.64, broadly in line with the equivalent Bund, which was 12 ticks higher.
"I think everything will be driven out of the U.S. Gilts will probably be playing follow-my-leader for the remainder of the session," said Lloyds strategist Eric Wand.
Earlier, gilts were unchanged after British retail data showed sales were flat in November, reflecting weaker consumer confidence and increasing the chance that the broader economy will contract in the final quarter of 2012.
"The poor performance for November confirms our view that after sales were boosted by temporary factors in Q3, the underlying trend for Q4 would be weak," said Barclays strategists.
Ten-year gilt yields fell 1 basis point to 1.95 percent. The spread over equivalent Bund yields was flat at just under 53 basis points, remaining within a couple of basis points of levels not seen since last year.
Investors will look ahead towards U.S. GDP and unemployment data later in the day that could set the direction in thin, pre-holiday trade, added Wand.
"This time of year, participation rates are few and far between," said Wand. "I don't see anything drastic coming out of Europe either so it's all going down to how the fiscal cliff situation evolves from here," he added.
(Reporting by Li-mei Hoang; Editing by Hugh Lawson)