LONDON: British government bond yields surged on Thursday as upbeat economic data and comments from Bank of England policymakers prompted investors to bring forward their bets on when the central bank is likely to start raising interest rates.
Five-year British government bond yields rose by the largest margin in almost seven weeks.
The benchmark five-year gilt yield, which is particularly sensitive to changes in policy rate expectations over the medium term, jumped 9 basis points to 1.21 percent, on track for the biggest daily rise since Feb. 6.
It peaked at 1.227 percent, its highest level in more than a week.
Retail sales figures on Thursday suggested Britain's consumer-led economic recovery remains strong.
Short sterling interest rate futures fell sharply, particularly for the 2016 contracts, indicating an increased likelihood of interest rate hikes next year.
"We're seeing a reassessment of rate expectations. The market probably got a little bit ahead of itself in thinking the BoE probably wouldn't raise rates until the latter half of next year," said Nick Stamenkovic, a strategist at RIA Capital.
He said the market was now pricing in a first BoE interest rate hike, from a record low 0.5 percent, around the second quarter of next year, rather than in the second half.
"The reaction is very significant today, given that equities are heading lower," Stamenkovic said, as gilt yields typically fall when share prices decline.
Some of the rise in gilt yields could also be explained by profit-taking, after gilt prices touched a seven-week high on Wednesday.
The Bank of England's chief economist surprised some observers last week by saying that slowing inflation meant the bank may have to consider cutting interest rates. However, three BoE policymakers said on Wednesday they saw little chance of a cut in interest rates in the face of tumbling inflation.
The 10-year gilt yield also rose 9 basis points on Thursday, to 1.57 percent, on track for its biggest daily gain since Feb. 6.
Gilts underperformed sharply against German Bunds, with the yield spread between British and German 10-year bonds rising by around 9 basis points on the day to 135 basis points.
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