LONDON (Reuters) - British 10-year government bond yields headed for their biggest one-day jump in more than 10 weeks on Tuesday, after a sharper-than-expected rise in inflation reignited concern that the Bank of England might take a hawkish turn this week.
Consumer price inflation rose to 2.9 percent in August - a level last exceeded more than five years ago - setting in train a slide in gilt prices that gathered pace as the day went on.
At 1408 GMT the benchmark 10-year gilt yield was at its highest level since Aug. 17 at 1.116 percent, up more than 7 basis points on the day. This was the biggest one-day rise in yield since June 29, and yields are now more than 15 basis points above a two-and-a-half month low struck on Friday.
Ten-year gilts’ yield spread over German Bunds widened by as much 3 basis points to 74 basis points, a level not seen since early August.
“Gilts are underperforming on the day, and the sell-off was generally triggered after the CPI data,” RBC fixed income strategist Vatsala Datta said.
Inflation worries added to concerns that the BoE could come out with a hawkish message on Thursday. While most economists polled by Reuters expect a 7-2 split in favor of keeping rates on hold at 0.25 percent, there is a chance that chief economist Andy Haldane could switch sides and back a hike.
The central bank is also expected to note sterling’s further fall since its meeting last month, which risks pushing inflation well above 3 percent later this year.
Datta said markets had brought forward their expectation of a BoE rate rise to August 2018, compared with September 2019 as recently as last week. Economists polled by Reuters last month did not expect a rate rise until 2019.
Wednesday brings the release of July labor market data - which is expected to show a small pick-up in lackluster wage growth - as well as the auction of 2.5 billion pounds ($3.32 billion) of the 1.25 percent 2027 gilt.
Editing by Alison Williams