LONDON, Jan 28 (Reuters) - British two-year government bond yields rose above 1% for the first time since 2011 on Friday as investors anticipated higher interest rates from both the Bank of England and the U.S. Federal Reserve.
Financial markets price in a 90% chance that the BoE will raise interest rates to 0.5% from 0.25% on Feb. 3, its second rate rise in less than two months as it seeks to keep a lid on inflation which hit its highest in nearly 30 years in December.
Raising rates to this level will also prompt the BoE to stop reinvesting the proceeds of maturing gilts from its 875 billion pound quantitative easing stockpile for the first time since the programme began in 2009. Around 28 billion pounds of gilts are due to mature in March.
"The maturing of gilts will create a steeper yield curve, as well as cool excess and speculative demand in the housing market. It will also help address the inflationary pressures (from) rental inflation," said Thomas Pugh, economist at accountants RSM UK.
Two-year gilt yields GB2YT=RR peaked at 1.010% at 1319 GMT - their highest since May 2011 - and were 1 basis points up on the day at 0.97%. They are on track to rise 30 basis points this month, the biggest calendar-month increase since November 2009.
Benchmark 10-year gilt yields GB10YT=RR were 1 basis higher on the day at 1.25% and are 27 basis points higher than at the start of the year.
Expectations of higher interest rates from the U.S. Federal Reserve - starting with a rate rise in March - have also put upward pressure on gilt yields this month. Some economists see as many as five quarter-point moves from the Fed this year.
Interest rate futures price in BoE rates hitting 1.5% by the end of this year. However some economists doubt they will rise rates that far, due in part to the upward impact on borrowing costs from the reversal of QE.
"The logic here is that slightly higher long-term rates reduce the need to hike rates at the front end of the curve," Pugh said.
(Reporting by David Milliken; Editing by Angus MacSwan)
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