* Graphic: sterling and gilt yields bit.ly/2dgAXn1
* Graphic: sterling year-to-date tmsnrt.rs/2egbfVh
(Adds details, wraps gilts)
By Andy Bruce and Anirban Nag
LONDON, Oct 17 A sell-off in the British
government bond market continued on Monday amid political
instability jitters, pushing 10-year gilt's yield to its highest
since June's Brexit vote and pressuring the battered pound.
Sterling's near-20 percent plunge since the vote to leave
the European Union has sent inflation expectations soaring,
driving investors to wind back bets on further interest rate
cuts and other Bank of England stimulus measures this year.
That plus foreign investor demand for an extra premium for
buying gilts was driving up yields, analysts said. Though German
Bund and U.S. Treasury yields have also been rising in recent
days, the fact that gilt yields have risen at a faster pace
reflects investor nervousness.
The benchmark 10-year gilt yield was at 1.13 percent
by 1600 GMT, up around 3 basis points on the day,
having risen to 1.223 percent earlier on Monday's nervousness.
"There's been a shift in dynamic since the start of October
that's very unusual for a G10 currency, particularly for
sterling, where higher yields are corresponding with a weaker
currency," said BNP Paribas currency strategist Sam
"At the moment rather than higher yields driving sterling,
you had a weaker pound driving higher inflation expectations, in
turn driving a steeper and higher UK rates curve."
Halfway through October, the 10-year gilt yield is on track
for one of the biggest monthly increases since the financial
crisis, up 37 basis points since the end of September.
Most of the increase this month reflects expectations of
higher inflation, with conventional bond yields rising fast but
inflation-protected bonds less so. In the last few days though,
inflation-protected bond prices have lost ground too.
"That does hint that there's a bit more of a risk premium
being put into gilts overall than there was before," said Jason
Simpson, strategist at Societe Generale.
Gilt yields have increased despite the BoE purchasing bonds
worth about 14 billion pounds a month. But because the market
had anticipated a further expansion of monetary policy - which
now looks unlikely this year - yields have surged back as these
Societe Generale's Simpson added that money markets now
priced in only about a 10 percent chance of an interest rate cut
INFLATION DATA EYED
Inflation figures on Tuesday mark the next major event.
Economists expect that consumer prices rose by 0.9 percent in
the year to September, up from 0.6 percent in August.
Inflation is expected to rise above 2 percent in 2017
because of a sharp fall in the value of the pound.
At the same time, the economy is expected to slow as Britain
begins the process of leaving the EU and tries to negotiate new
trade deals, leaving the economy facing a potentially toxic mix
of a tumbling currency, rising yields, accelerating inflation
and sluggish growth.
BoE Governor Mark Carney told a public meeting on Friday
that he was willing to allow inflation to run "a bit" higher
than the central bank's 2-percent target to help employment and
allow Britain's economy to grow.
Nonetheless, sterling fell to $1.2165, having lost
6 percent in the past two weeks alone, after Prime Minister
Theresa May raised the spectre of a "hard" Brexit, where the
government will negotiate for an exit that favours tighter
immigration controls over free trade.
Against the euro the pound fell 0.2 percent to 90.25 pence
Trade-weighted sterling was at 73.8, not far from a record
low of 73.4 struck last week.
(Writing by Anirban Nag and Jemima Kelly; Editing by Tom