LONDON: British two-year government bond yields surged to their highest since May 2011 on Thursday, following a rise in US Treasury yields after the Federal Reserve flagged an interest rate rise in March and more tightening later in 2022.
Two-year gilt yields hit a high of 0.996% at 0839 GMT, up more than 7 basis points on the day and pushing past a previous nearly four year high of 0.958% set on Jan. 19 after data showed British inflation had jumped to its highest since 1992.
Benchmark 10-year gilt yields were 5 basis points higher on the day at 1.25% at 0844 GMT, still some way below the nearly three-year high of 1.300% struck on Jan. 19.
US Treasury yields hit their highest in almost two years after Federal Reserve Chair Jerome Powell flagged an interest rate increase in March and said there was room for further policy tightening without hurting employment.
Economists at NatWest Markets said they now expected five quarter-point interest rate rises from the Fed this year, up from a forecast of three previously, and four more in 2023.
"Powell never once used the term 'gradual' or 'measured' to describe expected rate hikes," NatWest economist Kevin Cummins wrote in a note to clients.
The Bank of England became the world's first major central bank to tighten policy since the start of the COVID-19 pandemic when it raised rates to 0.25% in December from a record-low 0.1%, as it tries to stop rising inflation becoming entrenched.
Financial markets price in a 93% chance of a further BoE rate rise to 0.5% on Feb. 3 after its next meeting, and see rates at 1.5% by February 2023.
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