Two-year UK gilt yields briefly touch highest since January

LONDON, June 16 (Reuters) - British government bond prices

extended the previous day's steep losses on Friday, taking

two-year yields to their highest since January, as prices

tracked European debt lower a day after the Bank of England came

unexpectedly close to raising rates.

The two-year gilt yield peaked in early trade at

0.206 percent, its highest since Jan. 26 when upbeat economic

data in Britain had helped to boost demand for riskier assets.

It last stood at 0.18 percent, up around a basis point on

the day.

With (Other OTC: WWTH - news) no scheduled economic news in Britain, gilts mostly

tracked German Bunds and U.S. Treasuries. By 1100 GMT they had

mostly recovered from sharp losses after the market open.

On Thursday, British government bond prices tumbled after

three Bank of England policymakers voted for higher interest

rates, a shock split that sparked the biggest one-day rise in

five-year gilt yields since October 2015.

They were flat on Friday at 0.48 percent, having briefly

touched their highest level since June 5 at 0.512 percent.

Ten-year gilt yields were last up two basis

points on the day at 1.05 percent.

The yield spread between 10-year British and

German government bonds stood at 74 basis points,

little changed on the day.

Futures markets see a roughly 50 percent chance that the BoE (Shenzhen: 000725.SZ - news)

will raise interest rates from their record low 0.25 percent

within the next 12 months.

But some analysts think the chances are lower given the weak

economic outlook.

"If we want to start the next deflationary cycle in the UK,

then crack on and raise rates," said Chris Iggo, chief

investment officer for fixed income at fund manager AXA (Paris: FR0000120628 - news) .

"That is just what a teetering housing market needs right

now, not to mention the impact on consumption and investment as

the country starts Brexit negotiations," he added in a note to

clients.

Sept long gilt future 127.84 (-0.16)

Dec (Shanghai: 600875.SS - news) 2017 short sterling 99.61 (-0.01)

March 2018 short sterling 99.58 (unch)

10-year gilt yield 1.05 pct (+2 bps)

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(Reporting by Andy Bruce; Editing by Hugh Lawson)