LONDON: British government bond prices extended the previous day's steep losses on Friday, taking two-year yields to their highest since January, as prices tracked European debt lower a day after the Bank of England came unexpectedly close to raising rates.
The two-year gilt yield peaked in early trade at 0.206 percent, its highest since Jan. 26 when upbeat economic data in Britain had helped to boost demand for riskier assets.
It last stood at 0.18 percent, up around a basis point on the day.
With no scheduled economic news in Britain, gilts mostly tracked German Bunds and US Treasuries. By 1100 GMT they had mostly recovered from sharp losses after the market open.
On Thursday, British government bond prices tumbled after three Bank of England policymakers voted for higher interest rates, a shock split that sparked the biggest one-day rise in five-year gilt yields since October 2015.
They were flat on Friday at 0.48 percent, having briefly touched their highest level since June 5 at 0.512 percent.
Ten-year gilt yields were last up two basis points on the day at 1.05 percent.
The yield spread between 10-year British and German government bonds stood at 74 basis points, little changed on the day.
Futures markets see a roughly 50 percent chance that the BoE will raise interest rates from their record low 0.25 percent within the next 12 months.
But some analysts think the chances are lower given the weak economic outlook.
"If we want to start the next deflationary cycle in the UK, then crack on and raise rates," said Chris Iggo, chief investment officer for fixed income at fund manager AXA.
"That is just what a teetering housing market needs right now, not to mention the impact on consumption and investment as the country starts Brexit negotiations," he added in a note to clients.
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