LONDON, Sept 20 (Reuters) - British government bond prices tumbled on Tuesday as markets bet on faster interest rate rises by the Bank of England, more debt issuance and rapid tightening by the U.S. Federal Reserve to tame inflation.
Interest-rate sensitive two-year gilt yields leapt to their highest since October 2008 at 3.345%, an increase of 23 basis points (bps) since Friday's close, after the market was shut on Monday for a public holiday to mark Queen Elizabeth's funeral.
Taken as a single-day move, the surge in the two-year yield is the biggest since Aug. 17.
Five-year yields hit their highest since December 2008 at 3.317%, up 17 bps, while 10-year yields rose to the highest since July 2011 at 3.322%, up more than 15 bps.
U.S. and German bond prices also fell sharply - with the 10-year German yield up more than 15 bps too - as investors bet the U.S. Federal Reserve would raise rates by 75 bps on Wednesday to speed the fall in inflation.
Financial markets expect the Bank of England (BoE) to follow suit on Thursday, pricing in a 70% chance of a 75-basis-point increase in rates to 2.5%, and a 30% chance of a smaller 50-basis-point increase.
BoE rates are then expected to rise by half a point at the central bank's Nov. 3 meeting, and by another three quarters of a point on Dec. 15, taking rates to 3.75% by the end of the year - up from just 0.1% in late 2021.
Economists polled by Reuters last week expected a half-point rate rise this week and for rates to end the year at 3%.
The BoE last raised rates by three quarters of a percentage point in 1989, barring a failed attempt to support sterling on Black Wednesday in 1992.
Adding to headwinds for gilts, on Thursday the BoE is also expected to confirm that it will start outright sales from its 838 billion pound ($958 billion) gilt stockpile, at a pace of around 10 billion pounds a quarter.
On Friday, finance minister Kwasi Kwarteng will give more details of the costs of energy support measures.
"Foreign investors are concerned as to how government support will be financed - with the fear that this will largely come through an additional supply of UK gilts," ING head of FX strategy Chris Turner said.
A Reuters poll of bond strategists and economists published on Tuesday showed more than half see a high risk that investor sentiment in British assets will deteriorate sharply in the coming months.
Morgan Stanley head of UK rates strategy Theo Chapsalis said the plans were likely to lead to around 65 billion pounds more in net cash requirement over the rest of the financial year, and 170 billion pounds extra overall in the next 18 months.
However, he added it was possible the cost of supporting household energy bills might be financed through a government-backed special purpose vehicle - as had been done in some southern European countries - keeping the debt out of headline public borrowing numbers.