UK 10-year bonds head for biggest monthly fall since 1986

By David Milliken

LONDON (Reuters) - British government bonds tumbled again on Tuesday, catching up with losses for U.S. and German debt following a public holiday on Monday as markets digested remarks from Federal Reserve Chair Jerome Powell.

Ten-year British government bond yields are on course for their biggest monthly rise since September 1986 - when U.S. stock markets recorded what at the time was a record daily fall - while 30-year gilt yields rose above 3% for the first time since 2014.

Powell, speaking at an annual central banking conference in Jackson Hole in the United States late on Friday, said the Fed needed to adopt a restrictive monetary policy to curb inflation, even if that meant "pain" for households and businesses.

"Central bankers used Jackson Hole to reaffirm that their key focus remains on anchoring inflation expectations by rapidly raising the Fed Funds rate," economists at major bond fund manager PIMCO said on Tuesday.

British government bonds have been under selling pressure all month. A surge in energy prices has raised the outlook for inflation, reinforced a hawkish turn by the Bank of England and increased the risks of extra debt issuance by Britain's government to fund economic support measures.

Ten-year gilt yields rose 14 basis points to 2.75% on Tuesday and are now on track for their biggest calendar month rise since September 1986 with an 89-basis-point increase.

Two-year gilt yields briefly spiked by as much as 25 basis points to 3.072% shortly after trading started, and at 1345 GMT were up 11 basis points at 2.93%, on course for their biggest monthly rise since 1994's 'Great Bond Massacre'.

Financial markets see a roughly 40% chance that the BoE will raise rates by 0.75 percentage points to 2.5% at its Sept. 15 meeting - which would be its largest rate rise since 1989 - and expect rates to peak around 4.25% in the middle of next year.

British consumer price inflation entered double-digits for the first time in 40 years in July, and the BoE forecast it would exceed 13% in October, when regulated household energy prices are due to rise by 80%.

Goldman Sachs forecast on Monday that British inflation could reach 22% early next year, if natural gas prices hold near current levels.

The BoE and other economists expect higher inflation will push Britain's economy into recession later this year.

Britain's yield curve is currently inverted, with short-dated yields higher than longer maturities, which is often viewed as a harbinger of recession.

The yield for a 10-year gilt is currently about 20 basis points below the two-year yield - a degree of inversion last seen in June 2008, when the global financial crisis began to push Britain into a deep recession.

(Additional reporting by Andy Bruce; Editing by Alexandra Hudson)