UK gilts nearly flat in subdued trade; 10-year bond auction in focus

The UK gilts traded nearly flat Monday, succumbing to thin trading activity during a relatively quiet session that witnessed data of little significance.

The yield on the benchmark 10-year gilts, which moves inversely to its price, hovered around 0.72 percent mark, the super-long 40-year bond yield remained steady 1.20 percent and the yield on short-term 2-year bond rose 1/2 basis point to 0.140 percent by 09:30 GMT.

The United Kingdom’s shop price index fell during the month of August, following weakness in global crude oil prices; however, a depreciating domestic currency is likely to lend support to retail prices in the near term.

UK’s shop prices fell 2.0 percent in August compared with 1.6 percent in July, data released by the British Retail Consortium (BRC) showed Monday. The fall in prices was driven by promotions from retailers as well as a drop in the cost of oil.

On Friday, the August UK construction PMI rebounds, to 49.2 from 45.9 in July, better than the rise to 46.1 expected by the market, although still contracting for the third consecutive month. We rather suspect the August services PMI, due Monday, will also show a bounce back too, enabling the Markit-calculated composite PMI to depict a rebound from 47.3 in July, as all three key sectors of manufacturing, construction and services display a short-term post-Brexit referendum recovery.

Investors will remain keen to focus on the next week's ECB meeting, when there is a chance of another small deposit rate cut. The market will also look ahead to the 10-year gilt auction, manufacturing production, BoE MPC Member Cunliffe speech, BoE Governor Carney speech, inflation report hearings, NIESR GDP estimate, inflation expectations and trade balance.

Lastly, the trading volumes are expected to be thin as the US and Canadian markets remain closed today on account of Labour Day.

Meanwhile, the FTSE 100 traded 0.12 percent lower at 6,886 by 09:30 GMT.