UK gilts trade gain ahead of super long 30-year auction

The UK gilts gained Thursday as investors remained cautious ahead of the super-long 30-year bond auction. Also, weak crude oil prices encouraged traders for safe-haven buying.

The yield on the benchmark 10-year gilts, which moves inversely to its price, fell 2 basis points to 0.799 percent, the super-long 40-year bond yield dipped nearly 1 basis point to 1.423 percent and the yield on short-term 2-year bond slid 1 basis point to 0.112 percent by 09:10 GMT.

On Wednesday, the 52.6 reading on the September UK services sector PMI is a slightly better outturn than the market consensus prediction of 52.0 but is still down from 52.9 in August. This development, combined with improvements in the manufacturing and construction PMI activity gauges for the same month, allows the Markit-calculated composite PMI to harden, to 53.7, its highest since January, from 53.2 in August, which also contrasts with the consensus expectation of a dip to 52.3.

All the same the quarterly average of the key services sector PMI, eases to 51.0 in Q3 from 52.7 in Q2 forcing the Markit-calculated composite average down, to 51.4 in Q3 from 51.9 in Q2, and vs 54.2 in Q1. We see this development as a reaffirmation of slower paced growth trajectory in train over the balance of this year, to around 0.25 percent to 0.3 percent q/q per quarter, compared with 0.55 percent per quarter in H1.

Moreover, Bank of England Deputy Governor Broadbent said that the UK economy has performed 'somewhat more strongly' than the Bank's near-term forecasts, but policymakers shouldn't rush to judgement. Brexit-related uncertainty 'raises the bar' for investment decisions, but the GBP fall will help to cushion the impact. These balanced comments don't add much new to the policy equation. Whether the BoE cuts rates again in November is a close call but the data argues against it.

In addition, the UK gilts have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of England's target. Crude oil prices decline as investors cashed in profit after relishing previous gains. The International benchmark Brent futures fell 0.54 percent to $51.59 and West Texas Intermediate (WTI) also dipped 0.82 percent to $49.42 at 08:20 GMT.

Lastly, investors remained keen to focus on the series of upcoming economic data, highlighted by industrial production, trade balance and 10-year Treasury action.

Meanwhile, the FTSE 100 traded 0.18 percent lower at 7,021.50 by 09:10 GMT.