Short-dated UK yields jump after BoE minutes point to Aug rise

By Andy Bruce

LONDON, June 21 (Reuters) - Short-dated British government

bond yields rose sharply after the Bank of England's chief

economist unexpectedly voted to raise interest rates on

Thursday, heightening the chance that an increase will take

place in August.

Sterling rallied against the dollar on the news and the

policy-sensitive two-year gilt yield jumped around 5

basis points to its highest level since June 12 at 0.776

percent.

While it receded later in the day as renewed political

concerns around Italy pushed high-rated European borrowing costs

lower, the two-year gilt yield was still half a basis point

higher on the day as of 1530 GMT.

BoE Chief Economist Andy Haldane's surprise switch means

three out of nine Monetary Policy Committee members now support

higher interest rates.

"It definitely puts the market on notice that a rate rise

could come in August," Jason Simpson, fixed income strategist at

Societe Generale (Swiss: 519928.SW - news) , said.

The sterling overnight index average (SONIA) curve now

points to a more than 66 percent chance of a rate rise in

August, compared with an around 45 percent chance before

Thursday's BoE (Shenzhen: 000725.SZ - news) announcement, Simpson said.

A rise by the end of this year is almost 100 percent priced

in by investors. Economists polled by Reuters before Thursday's

rate decision had already pointed to August as the most likely

date for a rise.

Still, Simpson pointed out that the market's confidence that

rates would rise in May had been high until a couple of weeks

before the no-change decision last month.

"Now (Frankfurt: 11N.F - news) they're signalling that you could get a rate hike

pretty imminently, but it's dependent on the data, Brexit and

politics. Any of those moving parts could become undone,"

Simpson said.

As of 1530 GMT, the 10-year gilt yield stood 2.5 basis

points lower on the day at 1.27 percent, dragged down by the

move in German Bunds, having touched an intraday high of 1.348

percent after the BoE decision.

The premium that 10-year gilts offer over the equivalent

German Bund ballooned by around 5 basis points in the aftermath

of the BoE decision, and was still a couple of basis points

higher at 94 basis points by the end of the trading session.

Sept long gilt future 123.03 (+0.15)

Sept 2018 short sterling 99.19 (-0.05)

Dec (Shanghai: 600875.SS - news) 2018 short sterling 99.13 (-0.03)

10-year gilt yield 1.27 (-2.5 bps)

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UK debt speedguide

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(editing by David Stamp)