LONDON, May 25 (Reuters) - British bond prices tumbled again on Thursday as investors added to bets that high inflation will force the Bank of England to carry on raising interest rates, with two-year gilts on track for one of the biggest weekly falls in 20 years.
Gilt yields, which move inversely to prices, were last up on the day around 11 to 17 basis points (bps) over the range of maturities, adding to a similar jump on Wednesday as markets reeled from stronger-than-expected inflation data.
The moves represent a sharp tightening of financial conditions in Britain and are likely to concern BoE officials, with bond yields nearing levels seen during the "mini-budget" turmoil in financial markets last September and October.
The two-year gilt yield , which is especially sensitive to BoE rate expectations, rose on Thursday to its highest level since Sept. 29 at 4.55%, up 18 bps on the day.
So far this week the two-year yield has risen about 60 bps. Excluding the mini-budget announcement - a week in which the yield soared by 89 bps - the increase would be the biggest since similar moves during the 2008-2009 market crisis.
Craig Inches, head of rates and cash at Royal London Asset Management, said the sharp price moves had "definitely resulted in some pain" for investors, with liability-driven investment funds (LDIs) who service pension funds holding back on buying.
"However, despite all of this, the moves have been orderly and the market is still functioning okay despite the yield moves," he said.
Britain's biggest asset manager, Legal & General Investment Management, is avoiding taking a strategic position on gilts due to the uncertain outlook, its chief investment officer said on Thursday.
"The inflation data that we got yesterday in the UK will put a lot of pressure on the Bank of England in getting this balancing act right," Sonja Laud told reporters, adding that gilts were subject to higher volatility than U.S. bonds.
Swap rates - a key determinant of mortgage borrowing costs - have also soared this week by their most since 1989 excluding the mini-budget period.
One of Britain's biggest mortgage lenders, Nationwide Building Society, said it would increase interest rates on many new mortgages by 0.45 percentage points on Friday, while some smaller lenders withdrew products.
Financial markets priced in the BoE raising its Bank Rate - currently 4.5% - to 5.5% by November, compared with a 50% chance on Wednesday.
The gap between 10-year British and German government bond yields has widened this week to above 183 basis points. Excluding the mini-budget period, that difference represented the widest spread since the BoE became operationally independent of the government in 1997.
The sustained narrowing of the spread after 1997 had been viewed by British economic policymakers as a major achievement.
The 10-year gilt yield itself hit 4.379% on Thursday, its highest level since mid-October before receding to 4.37%, up about 15 bps on the day.
Bond strategists from NatWest, a primary dealer in British government debt, said they now expected the 10-year gilt yield to hit 4.6%. Saxo Bank said it thought the 10-year gilt yield could breach a key resistance level of 4.59%.
Additional reporting by Yoruk Bahceli and David Milliken; Editing by William Schomberg, Alexander Smith and Paul Simao