Bonds: Gilts advance amid poor data, Italian bank jitters

These were the movements in the most widely-followed 10-year sovereign bond yields:

US: Bank holiday (4 July)

UK: 0.83% (-3bp)

Germany: -0.14% (-1bp)

France: 0.16% (+1bp)

Spain: 1.15% (0bp)

Portugal: 2.98% (-3bp)

Greece: 7.87% (-1bp)

Japan: -0.24% (+1bp)

Gilts moved higher against a backdrop of selling pressure in euro area banks, as investors were greeted upon their return from the weekend break by the negative news-flow surrounding the outlook for Italy´s banking sector.

Shares of ailing lender Banca del Monte dei Paschi di Siena dropped by 13.28% to €0.33 as news swirled around the shares regarding reported plans by Rome to inject funds directly into the bank should signs of systemic stress appear, if necessary even in direct contravention of EU rule on state-aid for banks.

The Stoxx bank sector gauge lost 1.49% to 124.12.

That prompted analysts at Fitch Ratings to write: "The Italian government's exploration of initiatives to strengthen banks' capitalisation using public funds highlights the pressure on the banking sector from weak asset quality.

"Measures that would strengthen asset quality or capital without triggering bail-in could be positive for Italian banks' Issuer Default Ratings. But the impediments under EU legislation to using public funds will make a solution difficult to achieve."

Acting as a backdrop, S&P for its part took an axe to its projections for gross domestic product growth in the UK and the Eurozone in 2017 and 2018.

It forecast that the fall-out from Brexit would subtract 1.2 and 1.0 percentage points from British GDP growth in 2017 and 2018, respectively.

Analysts at S&P now saw UK GDP expanding at a 0.9% and 1.0% pace in each of those years.

They also said the Bank of England would cut Bank Rate to zero by the very end of 2016 and re-start its quantitative easing programme in 2017.

In further poor news, the pace of UK construction slowed more than expected in June, data released on Monday showed.

The Markit/CIPS UK construction purchasing managers’ index fell to 46.0 from 51.2 in May, marking its lowest level in seven years and below the 50.0 threshold that separates contraction from expansion for the first time since April 2013.

Economists had been expecting a reading of 50.5.

On a brighter note, the Chancellor announced his intention to lower the coporation tax rate to below 15.0%.