UK bond yields leap after holiday break to hit highest since 2019

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LONDON, Jan 4 (Reuters) - Yields on short-dated British government bonds started 2022 by hitting their highest level since mid-2019 as investors bet on more interest rate rises by the Bank of England against a backdrop of rising inflation.

Five-year gilt yields rose more than 8 basis points on the day to peak at 0.907% at 0920 GMT on their first trading day of the year, reaching a level last seen in May 2019.

Two-year yields rose a similar amount to peak at 0.766%, also their highest since May 2019 bar a few seconds at the start of trading on Oct. 29.

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Ten-year yields rose 6 basis points to 1.03%.

U.S. government borrowing costs surged on Monday, reflecting expectations of tighter Federal Reserve policy despite higher COVID-19 cases. Ten-year bond yields in the euro area were near two-month highs on Tuesday. read more

The BoE surprised investors by raising rates last month for the first time since the start of the COVID-19 pandemic, just as infections from the Omicron variant began to surge.

Six weeks earlier, it had held off a widely expected rate rise due to a lack of official data on the impact of the end of a job furlough programme. The BoE now forecasts consumer price inflation will hit a 30-year high of around 6% in April.

Investors are pricing in a greater than 80% chance that the BoE will raise its main rate to 0.5% after its next meeting on Feb. 3, and see rates at 1% by September.

A rate rise next month would also prompt the BoE to stop reinvesting proceeds from maturing bonds in its 875 billion pounds ($1.18 trillion) of gilt purchases, allowing the stockpile to fall for the first time since it began quantitative easing in 2009.

Britain recorded record numbers of new COVID-19 infections over the Christmas period, which has caused fewer people to go out shopping and badly hurt the hospitality industry, as well as driving high levels of staff absence.

But Prime Minister Boris Johnson on Monday said he did not think new legal restrictions would be needed in England despite considerable pressure on hospitals, as Omicron appeared to be milder than previous variants. read more

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Editing by Kate Holton and Alison Williams

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