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UK bond prices collapse after sterling hits record low

FILE PHOTO: Illustration shows pound banknotes

By David Milliken

LONDON (Reuters) -British government bond prices collapsed on Monday, pushing yields to their highest in over a decade, amid speculation that the Bank of England might need to take emergency action after sterling hit a record low against the U.S. dollar overnight.

Two-year gilt yields rose as much as 54 basis points on the day to 4.533%, their highest since September 2008, and at 0754 GMT were 44 basis points up on the day at 4.43%.

Five-year gilt yields jumped more than 44 basis points to 4.503%, their highest since October 2008, while benchmark 10-year yields hit their highest since April 2010 at 4.215%.

British government bonds prices have been under pressure for months, hurt by higher inflation and rising U.S. and Bank of England rates, but their fall accelerated massively on Friday after new finance minister Kwasi Kwarteng promised tax cuts.

Typically gilt yields rise or fall just a few basis points on the day, but on Friday the five-year gilt yield rose more than 50 basis points, representing the biggest one-day price fall since at least 1991.

Sterling broke past a previous low against the U.S. dollar that had held since 1985 in early Asian trading on Monday.

Bond market veteran Mohamed El-Erian, chief economic advisor to Allianz, said Kwarteng either needed to reverse course, or to prepare for an emergency BoE rate hike.

"There is only two choices for the country, one is he moderates his package ... Choice number two is he leaves it to the Bank of England and in that case the Bank of England would have to hike in an emergency meeting because they don't meet again until November," El-Erian told the BBC.

The BoE raised interest rates by half a percentage point to 2.25% on Thursday - its second consecutive half-point hike, after not increasing rates by that amount since 1995.

Rate futures now price in a three-quarters-of-a-point hike to 3% on or before the BoE's next scheduled rate announcement on Nov. 2..

(Reporting by David Milliken; Editing by Kate Holton)