UK gilts trade flat in thin trade, likely to remain range-bound

The UK 10-year gilt yield dropped to a new record low of 0.78 percent, following the BoE's pre-announcement of rate cuts on Friday, but we reckon it will trade in a 0.80 to 1.00 percent range for a while, with the risks to the downside.

The yield on the benchmark 10-year gilts rose 1 basis point to 0.876 percent, yield on super-long 30-year bonds climbed 1/2 basis point to 1.683 percent by 10:00 GMT.

The Gilt/Bund yield spread has also broken well below the 100 basis points mark for the first time since early 2015, and could narrow to 80-85 basis points multi-week. The 10-year Treasury-note/Bund yield spread is now at -60 basis points, which goes below its 2006 low to a post-2000 low.

Broadly speaking, there is a remarkable disconnect between Gilts and the surging FTSE-100, as with core government bonds and equity indices generally since the UK referendum, but we reckon that the fixed income market's implicitly-bearish outlook on the economy will prove more accurate.

According to Reuters, the S&P have already been on the wires this morning saying they expect the Bank of England to cut rates by the end of 2016 as they expect the UK to fall back into recession and that the 'Brexit' vote will be a drag on growth in 2017 and 2018.

However, they have subsequently given back most of their gains and are now down 5 ticks on the day 128.77 as European assets in general sell off. Stock markets are back in negative territory and all European government bond yields are higher on the day when compared to the Tradeweb close.

Markets have performed well post-Brexit so it is no surprise we are seeing a correction but with the US out for the Independence Day holiday one suspects that the market will lack momentum to make substantial losses but we could see the risk-off bias deteriorate further if bank shares fall further.

In terms of data, the UK June construction PMI reading of 46.0 vs 51.2 in May is by far and away worse than the 50.5 expected by the market consensus and even undershoots the 49.0 that marked the bottom end of the range of forecasts.

This latest reading is at its weakest since Jun 2009 and is clear evidence of how hard the uncertainty surrounding 'Brexit' has hit the construction sector, especially in house building and commercial property construction, even though it caused a dent in the manufacturing sphere last month. This latest development raises the likelihood that the summer rate cut hinted at by BoE governor Mark Carney could be delivered as soon as next week. GBP should buckle under the weight of this latest information.

Lastly, investors will remain keen to focus on the BoE governor Carney speech on Tuesday at 09:30 GMT.

Meanwhile, the FTSE 100 trading down 0.07 percent at 6,572 by 10:00 GMT.