Bonds: GIlts down again as traders reset expectations for Bank Rate

Gilts were again lower on Tuesday, dragged down in part by increased speculation regarding the likelihood of a December Fed hike.

As of 30 October, Fed funds futures were pricing in a 50% probability of a rise in rates at the 15-16 December FOMC.

Traders were also somewhat more anxious than usual following last Friday´s strong reading on UK manufacturing sector activity and ahead of the upcoming meeting of the Monetary Policy Committee, with the next US non-farm payrolls report set to published the next day.

The yield on the benchmark 10-year Gilt rose by four basis points to 1.97%, a six-week high. In parallel, similarly-dated US Treasury notes advanced by another four basis points to reach 2.21%.

Forwards contracts were now pointing to a first hike by the MPC come November 2016 instead of after Christmas of next year up and until 30 October.

US factory orders fell 1% month-on-month in September (consensus: 0.9%), fresh figures out from the Department of Commerce revealed. Alongside the downwards revisions to the previous month´s figures, that led Barclays to lower its 'tracking estimate' for the rate of growth in third quarter GDP to 1.4% from 1.5%.

However, the data added little new information regarding the current state of US manufacturing, Barclays Jesse Hurwitz wrote to clients.

UK government debt was the worst performer among sovereign debt markets in the past month, according to Bloomberg data.

Italian and Spanish 10-year bond yields were drifting marginally lower, by one basis point each, to 1.64% and 1.74%, respectively.

In a note sent to clients, economists at RBS pointed out a paper published by the European Central Bank on Tuesday in which the ECB called for more structural economic reforms by euro area countries in exchange for fiscal flexibility.

The paper was to be included in Thursday´s economic bulletin.

Further afield, analysts at Bank of America-Merrill Lynch said Saudi Arabia was facing an "elevated" risk of another downgrade out of Standard&Poor´s. The rating agency´s projections for a budget deficit worth 10% of GDP in the Kingdom were too optimistic, they said.