UK gilts plunge despite weak manufacturing PMI; likely to gain on BoE easing hopes

The UK gilts plunged on Monday as investors did not react to the weak manufacturing PMI data. The 10-year gilt yield followed Treasuries and hit a new record low below 0.68 percent on Friday. We foresee that gilts shall continue to outperform on the upside ahead of the BoE's likely easing move on Thursday.

The yield on the benchmark 10-year gilts rose nearly 2 basis points to 0.705 percent, the yield on super-long 40-year bond also jumped 2 basis points to 1.421 percent and the yield on short-term 2-year bonds bounced 3 basis points to 0.144 percent by 10:30 GMT.

The final reading of the UK July manufacturing sector PMI is revised down to 48.2 from a flash print of 49.1, as compared to 52.4 in June, pulling it down to its worst reading since February 2013 as the UK's decision to 'Brexit' takes its toll on orders and output, both of which have now descended into contraction territory.

This is set to contribute to a downward revision of the Markit calculated composite PMI for Jul, from its flash print of 47.7, as compared to 52.4 in the last month. At this rate investors could be staring negative q/q GDP growth in the face in Q4 2016, if not sooner.

Moreover, the Bank of England is expected to ease interest rates at its monetary policy meeting scheduled for August 4. The Brexit vote last month gave a shock to the financial markets, which made investors speculate that the central bank would cut rates or inject stimulus for stabilising financial markets turmoil.

According to recent Reuters poll, the BoE would hold off for now on restarting its asset purchase programme. All but three of the 49 economists surveyed since Friday expect the Bank to cut at least 25 basis points from the already record low 0.5 percent it has sat at since early 2009. The median forecast was for a cut to 0.25 percent.

While 17 of 36 said the 375 billion pounds quantitative easing programme that was wound down in 2012 would also be restarted by the MPC this week, 19 said it would not, they added.

Meanwhile, the British pound tumbled to more than 3 decades low against the US dollar earlier in July in the aftermath of the Brexit vote, which clouded the UK’s economic outlook and increased bets on the central bank policy actions.

Meanwhile, the FTSE 100 trading down 0.18 percent at 6,712 by 10:40 GMT.