Bonds: Gilts underperform, Spanish debt in focus

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

US: 1.57% (-2bp)

UK: 0.67% (+3bp)
Germany: -0.07% (-0bp)
France: 0.18% (-0bp)
Italy: 1.17% (+3bp)
Spain: 1.06% (+4bp)
Portugal: 3.04% (+0bp)
Greece: 8.11% (+1bp)
Japan: -0.05% (+2bp)

Gilts underperformed following a much stronger-than-expected reading on the UK factory sector, although economists appeared somewhat unconvinced.

Markit´s manufacturing sector purchasing managers´ index for Britain jumped from a reading of 48.3 in July to 53.3 for August (consensus: 49.0).

However, "the rebound in the manufacturing PMI exaggerates the strength of the sector’s revival," Pantheon Macroeconomics´s Samuel Tombs said in a research report sent to clients.

"The output balance was boosted by rapid inventory accumulation, and excessive seasonal adjustment. The construction PMI (which was due the next day) likely will signal continued contraction, given the sector’s sensitivity to confidence," Tombs added.

For his part, Dominic Bryant at BNP Paribas was of the following view: "Overall, the manufacturing PMI was clearly far stronger than anyone was forecasting. However, manufacturing only accounts for around 10% of the economy; ultimately what happens to the service sector, which accounts for 80% of the economy, will be more important for overall output. Thus far, service sector indicators have been weak and consistent with a marked slowdown. Or even a contraction, in the economy."

Nevertheless, it was longer-dated Spanish sovereign debt which underperformed on Thursday amid possible indications of slightly weaker demand at a sale of 30-year debt.

Acting as a backdrop, the political stalemate in the country´s politics continued after the interim government failed to obtain sufficient votes on 31 August to form a stable government.

Madrid auctioned €3.98bn of debt maturing in 2019, 2026 and 2046, more or less in-line with the amount expected by analysts.

However, the tranche of 30-year bonds only garnered a bid-to-cover ratio of 1.61, down from the 2.25 fetched by the government the last time around.

Further afield, Standard&Poor´s affirmed its A+ rating for Japan´s sovereign debt, with a 'stable' outlook.