LONDON, Sept 15 (Reuters) - Short-dated British government bond yields surged to their highest level since last year's Brexit vote on Friday, after the Bank of England doubled down on its new warning that official interest rates are likely to rise soon.
Yields on two-year and five-year British government bonds are on track for their biggest weekly gains since 2010 and 2008 respectively, after financial markets piled into bets that the BoE will raise rates at its next meeting on Nov. 2.
BoE policymaker Gertjan Vlieghe, who had previously warned of the dangers of a premature rate rise, said in a speech on Friday that "we are approaching the moment when Bank Rate may need to rise".
Financial markets now price in a 62 percent chance of a rate rise at November's meeting, up from 54 percent after the BoE published its September policy statement on Thursday, ADM Investor Services market strategist Marc Ostwald said.
The chance of a rate rise by February's meeting is 77 percent, he added.
"The move is not really surprising, in the sense that of all the MPC members who have been dovish, it is Vlieghe who everyone has identified as the arch-dove," Ostwald said.
Five-year yields were the biggest risers, 7 basis points up on the day at 0.73 percent at 1335 GMT, after earlier peaking at 0.772 percent, their highest since June 23, 2016, the day Britain voted to leave the European Union.
Two-year yields peaked at 0.482 percent, also their highest since the day of the Brexit vote, before the gilt pared losses to yield 0.44 percent, up 6 basis points.
Ten-year yields also rose 6 basis points on the day to 1.30 percent, but were not able to sustain a break above levels seen in July and at the start of 2017, and even longer maturities showed a similar more muted reaction.
Vlieghe said that the BoE did not intend to raise rates just once if the economy grew as forecast, but said moves would depend heavily on data and had a relatively shallow trajectory.
Compared with 10-year U.S. and German debt, gilts underperformed heavily. Yield spreads over Bunds reached 90 basis points earlier on Friday, their highest since March, while yields relative to Treasuries reached their highest since November 2016.
At 1335 GMT yields on 10-year gilts were 29 basis points up on the week, their biggest rise since February 2015, while five-year yields were up 35 basis points and two-year yields gained 28 basis points.
However, Ostwald said it would be wrong to see a November move as certain, even if the BoE appeared to have painted itself into a corner.
"Do we believe they are going to walk the walk? They've done a lot of talking the talk over the past four years, and the only thing that's happened is a rate cut," he said.
Dec long gilt future 124.52 (-0.76)
Dec 2017 short sterling 99.48 (-0.03)
March 2018 short sterling 99.37 (-0.04)
10-year gilt yield 1.30 pct (+6 bps)
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(Reporting by David Milliken; Editing by Toby Chopra)