UK 10-year gilt yields draw nearer to May high of 1.50 pct mark; construction PMI in focus

The UK 10-year gilt yields drew nearer to 1.50 pct mark on Thursday, a level last observed in May this year. We continue to foresee that the 10-year gilt yields will increase towards 1.50 percent multi-day and then 1.60 percent.

The yield on the benchmark 10-year gilts, which moves inversely to its price, rose 3 basis points to 1.45 percent, the super-long 40-year bond yield climbed 4 basis points to 1.88 percent and the yield on short-term 2-year bounced 1/2 basis point to 0.13 percent by 10:00 GMT.

The British gilts have been closely following developments in the U.S. debt market. The United States benchmark 10-year Treasury yield climbed 4-1/2 basis points to 2.41 percent post-OPEC deal, hitting highest since July 2015.

Crude oil prices rallied after OPEC agreed to output cuts in OPEC ministerial gathering at Vienna yesterday. The International benchmark Brent futures rose 1.10 percent to $52.41 and West Texas Intermediate (WTI) jumped 1.05 percent to $49.96 by 05:30 GMT.

The Organization of the Petroleum Exporting Countries (OPEC) has agreed to cut production by roughly 1.2 Mb/d to 32.5, which equates to a 4.5-4.6 percent cut per member country. We believe the outcome is consistent with our view of what OPEC production levels were expected to be in 2017 irrespective of the deal reached yesterday, reported Barclays in its research note.

In other words, the meeting is highly unlikely to substantially affect the oil market balance.  Compared with our assessment of OPEC supply last month, we have adjusted our first-quarter of 2017 production estimate lower by 350 kb/d, which will result in a slightly steeper draw than our balances were forecasting, they added.

Moreover, UK BoE Governor Mark Carney said that the UK financial system has endured well, suppressing, rather than magnifying financial market pressure, adding that the most significant risks to UK financial stability come from overseas and singles out highly leveraged Chinese corporates.

He highlights that the smooth financing the UK's historically large current account deficit is dependent on foreign investors and points out that GBP weakness since the EU referendum is reflective of the market's expectation of a modest increase in real income and reduced open trade.

He also points out rising domestic household indebtedness for the first time since the financial market crisis, as consumers draw down savings and increase borrowing. He warns that additional risks to the Eurozone could occur as a result of 'Brexit', adding that it will take a while to clarify the UK's future relationship with the EU, while the orderliness of the adjustment will affect stability.

Lastly, investors will remain keen to focus on the upcoming construction PMI data as an overall contraction sector makes up to 5.9 percent of GDP.

Meanwhile, the FTSE 100 traded 0.62 percent lower to 6,742 by 10:00 GMT. While at 10:00 GMT, the FxWirePro's Hourly GBP Strength Index remained slightly bullish +91.63 (higher than +75 represents purely bearish trend).