LONDON: Two-year British government bond yields rose to their highest in nearly three years on Monday as market participants brought forward rate hike expectations following last week's comments from the head of the Bank of England.
Governor Mark Carney took markets by surprise when he said on Thursday that a rise in the BoE's main rate from a record low 0.5 percent could come sooner than markets had thought.
That prompted markets to revise the expected date of a first increase to the end of this year from early 2015.
Monday's bond losses were led by short-end paper, which is most sensitive to rate expectations.
But 10-year British gilts also underperformed their German counterparts, with the yield gap between the two reaching its highest since mid-1997.
"The very fact that he directly referenced market pricing ... means (a) serious probability of rate hikes in 2014," RBS interest rate strategist Simon Peck said.
"That's why we've seen the short-end trade very weakly and I think it will continue to do so until the minutes on Wednesday."
Two-year bonds fell the most, with the yield 5 basis points higher at 0.91 percent at 1455 GMT. It hit its highest since July 2011 at 0.919 percent earlier.
Five-year yields rose 2 basis points to 2.10 percent.
Peck said markets were now fully pricing in a 25 basis point rate rise by the end of this year, having previously discounted one by February or March of 2015.
Ten-year bonds were slightly lower on the day, with the September gilt future down 9 ticks at 108.98. The yield spread between gilts and 10-year Bunds was nearly 141 basis points, up from 138 basis points on Friday.
Investors will be scouring minutes from the Bank of England's June 4-5 meeting, due to be released on Wednesday, to gauge the likelihood of an earlier rate hike and to see if any policymakers voted for a rise this month.
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