UK gilts plunge on higher than expected construction PMI; BoE decision eyed

The UK gilts plunged on Tuesday after data showed that the country’s construction PMI increased higher than expected in July. Also, stabilised crude oil prices drove-out investors from safe-haven buying.

The yield on the benchmark 10-year gilts rose 6 basis points to 0.788 percent, the yield on super-long 40-year bond also jumped 5 basis points to 1.485 percent and the yield on short-term 2-year bonds bounced 4-1/2 basis points to 0.205 percent by 09:50 GMT.

The UK construction sector PMI (overall contraction in the sector that makes up 5.9 percent of GDP) increased to 45.9 in July, higher than the market consensus expectations of 43.8, but below its June reading of 46.0 and points to construction activity having contracted at its fastest pace since Jun 2009.

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 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 next week, 19 said it would not, they added.

Lastly, crude oil prices stabilised with some bargain-hunting after dropping below $40 for the first time since April. The International benchmark Brent futures rose 0.93 percent to $42.53 and West Texas Intermediate (WTI) jumped 0.92 percent to $40.43 by 09:50 GMT.

Meanwhile, the FTSE 100 trading down 0.52 percent at 6,658 by 09:50 GMT.