British two-year government bond yields rose to their highest since May 30 on Monday after Saudi Arabia announced its biggest cut to oil production in years over the weekend, bolstering inflation concerns.
Interest-rate sensitive two-year gilt yields rose as high as 4.445% at 0858 GMT and five-year gilt yields hit 4.184%, both up more than 8 basis points (bps) from Friday's close, while 10-year yields were as much as 7 bps higher at 4.226%.
Yields rose by a smaller amount for U.S. and German government bonds, with euro zone purchasing managers' index data coming in below expectations, while its British equivalent edged up from an earlier provisional estimate.
While many economists financial markets expect the U.S. Federal Reserve to keep interest rates on hold next week, they still expect the Bank of England to raise its main interest rate to 4.75% from 4.5% on June 22, and for BoE rates to peak at 5.5% at the end of this year.
"The UK increasingly looks like an outlier on the inflation front which should drive further cross-market underperformance," said Imogen Bachra, head of UK rates strategy at NatWest Markets, who expects the 10-year gilt yield to reach 4.6%.
Short-dated gilts last month suffered their heaviest sell-off since September's post-"mini-budget" panic, largely off the back of higher-than-expected April inflation data.
Last week BoE policymaker Catherine Mann - the most hawkish member of the BoE's Monetary Policy Committee - said Britain appeared to have a greater problem with persistent inflation than its peers.
NatWest forecast that core inflation - a measure closely watched by the BoE, which strips out volatile food and energy prices - had yet to peak in Britain, despite headline price growth hitting a 41-year high of 11.1% in October.
Despite this, market expectations for retail price inflation over the medium are down sharply from last year's highs. The break-even rate on five-year gilts currently stands at 3.56%, down from more than 5% in March 2022 and not far above pre-pandemic levels.
The interest-rate premium which British government bonds pay above other major economies' debt remains high, however.
Ten-year gilts yield 185 bps more than equivalent German bonds - below peaks of more than 200 bps seen in September and October, but well their long-run average of closer to 100 bps and 1.3 bps wider on the day.
NatWest said this premium did not make gilts a bargain for investors, given considerable further bond issuance ahead.
"Higher yields may be a trigger for less, rather than more, demand as investors are unenthusiastic about catching a falling knife," NatWest's Bachra said. (Reporting by David Milliken; Editing by Kate Holton and Andy Bruce)