Bonds: Gilts underperform, alongside JGBs

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

US: 1.494% (+4bp)
UK: 0.73% (+5bp)
Germany: -0.10% (+2bp)
Spain: 1.03% (+1bp)
France: 0.13% (+3bp)
Italy: 1.18% (+1bp)
Portugal: 2.90% (-3bp)
Greece: 8.20% (+4bp)
Japan: -0.14% (+6bp)

Gilts underperformed as traders positioned themselves ahead of Thursday´s Bank of England policy announcement and the next monthly US jobs report which was scheduled for release on the following Friday.

That was despite a worse than expected print of 48.2 for the Markit UK purchasing managers´ index for the factory sector in in July to 48.2, with the pace of contraction the worst since early-2013.

“The weakening order book trend and upswing in cost inflation point to further near-term pain for manufacturers. On that score, the weak numbers provide powerful arguments for swift policy action to avert the downturn becoming more embedded and help to hopefully play a part in restoring confidence and driving a swift recovery,” said Chris Williamson, chief economist at Markit.

Acting as a backdrop, overnight economic data out of China came in generally ahead of expectations, with the US Treasury auctioning a total of $68bn in three and six-month bills after the close of trading in London.

Also overnight, the presidents of the regional Fed banks of Dallas and New York sounded a prudent tone on the economic outlook Stateside but held out the prospect of further rate hikes if the data warranted it.

To take note of as well, Tokyo was expected to unveil the details of its 28trn yen fiscal stimulus package the next day.

The country´s prime minister Shinzo Abe had already pre-announced the stimulus in a speech during the previous week.

According to a person familiar with the matter cited by Bloomberg, approximately 7trn yen of the total package would be made up by actual spending.

In terms of economic data, the main release on Monday was the ISM manufacturing sector PMI, which slipped from 53.2 in June to 52.6 in July (consensus: 53.0).

"However, details revealed that the underlying momentum in the manufacturing sector remains quite strong. Production improved on the month while new orders remained flat, remaining in solid expansionary territory. New export orders declined slightly, but remained above the 50-mark. Overall, today’s report suggests that the US manufacturing sector is returning to growth following an extended period of stagnation," economists at Barclays Research said in a report sent to clients.