LONDON (Reuters) - British government bonds tumbled on Friday, pushing yields to their highest level since mid-2011 as a brighter economic outlook encouraged investors into dump fixed-income assets for equities.
Thin trading conditions amplified the move, lifting the 10-year yield to 3.083 percent, more than double the record low touched in 2012 and a full percentage point above where it started the year.
U.S. Treasury yields also rose to their highest since 2011, reflecting strong data that has fuelled expectations of a steady reduction in bond-buying by the Federal Reserve next year.
Britain’s economic turnaround has been even more dramatic. The economy - which at the start of the year looked headed for a triple-dip recession - is now one of the fastest-expanding in the industrialised world with annual growth of more than 3 percent.
Expectations that the Bank of England will be the first major central bank to raise interest rates has sent the spread over Bunds to its widest since 2005 and gilt investors bracing for one of their worst performances on record.
On a total return basis, gilt investors have lost more than 4 percent this year compared to losses of 3 percent for U.S. Treasuries and less than 2 percent for Bunds, according to Citi data.
With no fresh data to give direction, traders took their cue from a slew of upbeat indicators released in the run-up to Christmas and from moves in other markets.
Britain’s top share index got a boost from fresh all-time highs on Wall Street and notched up a sixth straight day of gains.
Gilt prices fell from the open, reacting to losses in U.S. Treasuries on Boxing Day when British markets were shut. The move gathered pace when the 10-year gilt yield vaulted 3.02 percent, a technical level tested - but not broken - several times in September.
“Gilts were just playing catch-up with the rise in Treasury yields early on, but the break on the charts has given some momentum,” said Citi fixed income strategist Nishay Patel.
By 1630 GMT, the spread over 10-year gilts had widened to 112 basis points, double the level at which it started the year.
Optimism in Britain’s economic recovery was also evident on the foreign exchanges where the pound hit a 2-1/2 year high against the dollar.
Editing by Alison Williams