UK gilts rise on weak retail sales, strong demand at 10-year bond auction

The UK gilts gained Tuesday after reading lower-than-expected August retail sales, which registered the weakest growth since April. Also, bond yields slide as the results of a 10-year bond auction showed solid demand.

The yield on the benchmark 10-year gilts, which moves inversely to its price, fell 3-1/2 basis points to 0.686 percent, the super-long 40-year bond yield dipped 4 basis points to 1.50 percent and the yield on short-term 2-year bond slid 2-1/2 basis points to 0.112 percent by 10:50 GMT.

The United Kingdom BRC August retail like-for-like sales fell -0.9 percent y/y, against market expectation of 1.4 percent y/y rise, from up 1.1 percent in July. On a total basis, sales declined 0.3 percent, against a 0.1 percent increase in August 2015.

This is the weakest performance since September 2014, excluding Easter distortions. On a three-month basis, total UK retail sales rose 0.6 percent, half the rate of the 12-month average of 1.2 percent.

On Monday, 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.

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 manufacturing production, BoE MPC Member Cunliffe speech, BoE Governor Carney speech, inflation report hearings, NIESR GDP estimate, inflation expectations and trade balance.

Meanwhile, the FTSE 100 traded 0.24 percent lower at 6,862.86 by 11:00 GMT.