UK gilts slump as construction PMI rebounds sharply in August

The UK gilts slumped Friday after recent data showed that construction PMI rebounded higher than expected in August. Also, better-than-expected manufacturing PMI released on Thursday drove-out investors from safe-haven buying.

The yield on the benchmark 10-year gilts, which moves inversely to its price, rose 3 basis points to 0.697 percent, the super-long 40-year bond yield also climbed 3 basis points to 1.174 percent and the yield on short-term 2-year bond bounced more than 1 basis point to 0.135 percent by 10:20 GMT.

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.

On Thursday, the UK manufacturing sector PMI rebounds far more sharply than market envisaged, soaring straight back into bona fide expansion territory, of 53.3, from a revised contractionary reading of 48.3 (previous was 48.2), and vs 49.0 expected by the market consensus.

This is the highest print since October 2015 and it is evident that the weak GBP is helping to shore up foreign demand for UK exports, with the survey showing a surge in the export orders sub-index to 54.9, its highest since June 2014, from 51.4 in July.

Confidence is also likely to have been supported by the BoE's sledgehammer monetary easing measures implemented in early-August. If the PMI increase is sustained, this suggests that the manufacturing sector might not slide into recession in the short-term and the BoE might refrain from implementing additional stimulus measures in November.

Additionally, the latest house price survey from the Nationwide that surprised on the upside with a rise of 0.6 percent m/m (5.6 percent y/y) in August, against market expectations for -0.3 percent (+4.8 percent y/y).

Lastly, investors will remain keen to focus on the next week's ECB meeting, when there is a chance of another small deposit rate cut.

Meanwhile, the FTSE 100 traded 0.83 percent higher at 6,802 by 10:20 GMT.