UK government bonds slide for second day as Fed rate hike nears

By David Milliken and Andy Bruce

LONDON, Dec (Shanghai: 600875.SS - news) 4 - British government bonds extended Thursday's heavy losses after strong U.S (Other OTC: UBGXF - news) . employment data boosted the chance of a Federal Reserve rate hike on Dec. 16, though a surprise move by oil-producing nations not to scale back output limited the fall.

Ten-year gilt yields touched their highest in two-and-a-half weeks at 1.982 percent after figures showed that the U.S. economy created 211,000 jobs last month, more than economists had expected.

But gilt prices pared losses when OPEC members failed to agree an oil production ceiling at a meeting that ended in acrimony, after Iran said it would not curb production until it restored output after years under Western sanctions.

Ten-year gilt yields finished the day 4 basis points higher at 1.93 percent after jumping 13 basis points on Thursday when European Central Bank President Mario Draghi disappointed expectations for significant further monetary stimulus.

"We would have thought all else equal that the sell-off triggered by the payrolls data would have continued," UBS fixed-income strategist John Wraith said. "Maybe after the scale of the moves earlier this week ... people (are) battening down the hatches after a pretty volatile week."

Next (Other OTC: NXGPF - news) week brings data on industrial output, trade and construction that will help economists work out whether Britain's economy has maintained momentum into the final three months of 2015.

Thursday's policy decision by the Bank of England is all but certain to make no change in interest rates, and most economists do not expect a move until the middle of next year.

Wraith said that in the light of the U.S. jobs data, financial markets had brought forward their pricing of a BoE (Shenzhen: 000725.SZ - news) rate rise to late 2016 from early 2017.

Analysts at Capital Economics saw volatility in the gilt market persisting, with prices torn between U.S. Treasuries, under pressure from the start of Fed tightening, and rock-bottom German bond yields.

"With (Other OTC: WWTH - news) the Bank of England likely to be caught somewhere in the middle over the coming months, UK bonds could be in for a choppy ride," Capital (Other OTC: CGHC - news) economist Paul Hollingsworth wrote in a note to clients.

Dec long gilt future 116.79 (-0.56)

June 2016 short sterling 99.27 (-0.01)

10-year gilt yield 1.93 pct (+4 bps)

-------------------KEY MARKET DATA--------------------------- Long Gilt futures Gilt benchmark chain Short Stg futures Cash market quotes Deposit rates Sterling cross rates UK debt speedguide -------------------KEY MARKET REPORTS-------------------------- Gilts Sterling Euro Debt Dollar U.S. Treasuries Debt reports --------------------GILT STRIPS DATA ------------------------- Gilt strips data All gilt strips Gilt strips IO Gilt strips PO (Editing by Ruth Pitchford)