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British gilt yields soar after BoE rate signal shock

LONDON, Sept 14 (Reuters) - British government bond yields jumped on Thursday after the Bank of England said its first interest rate rise in a decade could take place in the coming months.

Two-year British government bond yields rose 9 basis points on the day to 0.38 percent, within a whisker of the post-Brexit vote high of 0.397 percent reached on June 30 and the biggest one-day rise since January.

Since late on Friday two-year gilt yields have risen by 24 basis points, bolstered by an unexpectedly big jump in inflation to 2.9 percent on Tuesday as well as expectations of a hawkish tone from the BoE.

This is the biggest rise in two-year yields during the course of a week since February 2011, as investors price in an increased chance that the BoE will reverse last year's quarter point cut in rates to a record-low 0.25 percent.

"It seems abundantly clear ... that the Monetary Policy Committee is seriously considering a rate hike at its next meeting in November," Investec economist Philip Shaw said, adding that a rate rise seemed fully priced for February.

Economists at Citi and RBC said markets priced in more than a 50 percent chance of a rate hike at the Nov. 2 meeting.

Short sterling interest rate futures dropped around 10 ticks for contracts from June 2018 onwards and the December 2017 contract fell to its lowest since early July.

Five-year gilt yields rose 10 basis points to 0.66 percent and 10-year gilt yields gained 8 basis points to 1.23 percent, returning to a level last seen at August's policy meeting, when the BoE said rates could rise faster than markets expected.

Gilts heavily underperformed against U.S. and German debt, with their spread over 10-year Bunds widening by 12 basis points to 82 basis points, the highest since April.

Nonetheless, many economists worry that past experience suggests BoE talk will not be swiftly followed by action.

"In our view, the minutes don't communicate whether or not November 2017 or February 2018 is more likely, just that a move at either of those meetings is more likely than it was back in August," RBC analysts Sam Hill and Vatsala Datta wrote.

Dec long gilt future 125.28 (-0.81)

Dec 2017 short sterling 99.51 (-0.06)

March 2018 short sterling 99.41 (-0.08)

10-year gilt yield 1.23 pct (+8 bps)

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Long Gilt futures Gilt benchmark chain Short Stg futures Cash market quotes Deposit rates Sterling cross rates

UK debt speedguide

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(Reporting by David Milliken; Editing by Alison Williams)