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LONDON, May 25 (Reuters) – British bond prices fell again on Thursday as investors added to bets that high inflation will prompt the Bank of England to keep raising interest rates as two-year rates set for one of their weekly declines. in 20 years.

Gilt yields, which move inversely to prices, rose by around 11 to 17 basis points (bps) across maturities in the last day, adding to a similar jump on Wednesday, as markets relived stronger-than-expected inflation data.

The moves represent a sharp tightening of Britain’s financial conditions and are likely to concern BoE officials as bond yields approach levels seen during the “mini-budget” turmoil in financial markets last September and October.

The two-year gilt yield, which is particularly sensitive to BoE rate expectations, rose to its highest level since Sept. 29 at 4.55% on Thursday, up 18 bps on the day.

So far this week, the two-year yield is up about 60 bps. Excluding the mini-budget announcement, the week when yields rose 89 bps, the increase would be the biggest since similar moves during the 2008-2009 market crisis.

Craig Inch, head of rates and cash at Royal London Asset Management, said the sharp price movements had “definitely caused some pain” for investors as liability-oriented investment funds (LDI), which cater to pension funds, lagged. from shopping.

“However, despite all this, the movements have been orderly and the market is still functioning normally despite the yield movements,” he said.

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Britain’s biggest asset manager, Legal & General Investment Management, is avoiding strategic positions in gilts because of the uncertain outlook, its chief investment officer said on Thursday.

“The inflation data we got yesterday in the UK will put a lot of pressure on the Bank of England to get this balancing act right,” Sonia Laud told reporters, adding that gilts are subject to more volatility than US bonds.

Exchange rates, a key determinant of mortgage borrowing costs, also rose this week to their highest level since 1989, excluding the mini-budget period.

Nationwide Building Society, one of Britain’s biggest mortgage lenders, said it would raise rates on many new mortgages by 0.45 percentage point on Friday, while some smaller lenders withdrew products.

Financial markets are pricing in the BoE raising its Bank Rate, currently 4.5%, to 5.5% by November, compared to a 50% chance on Wednesday.

The spread between the 10-year yields on British and German government bonds widened to more than 183 basis points this week. Excluding the mini-budget period, the gap represented the widest spread since the BoE became operationally independent from the government in 1997.

After 1997, the steady reduction in spillovers was seen as a major achievement by British economic policymakers.

The 10-year gilt yield hit 4.379% on Thursday, its highest level since mid-October, before retreating to 4.37%, down about 15bp on the day.

Bond strategists at NatWest, a major dealer in British government debt, said they now expect the 10-year gilt yield to reach 4.6%. Saxo Bank said it believes the 10-year gilt yield could breach key resistance at 4.59%.

Additional reporting by Yoruk Bahceli and David Milliken; Editing by William Schomberg, Alexander Smith, and Paul Simao

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