By David Milliken
LONDON (Reuters) - British 30-year government bonds suffered their sharpest fall since November on Thursday as the prospect of higher U.S. interest rates compounded damage from pension changes announced in Britain's annual budget on Wednesday.
The yield on 30-year gilts jumped by 6 basis points to finish at 3.55 percent, the biggest jump since November 21 when gilts were hammered by strong industrial orders and a more hawkish U.S. policy outlook.
The latter was again a factor on Thursday, after Federal Reserve chairwoman Janet Yellen said the U.S. central bank would probably end its massive bond-buying programme this autumn and raise interest rates around six months later.
The prospect of higher U.S. interest rates triggered widespread falls in government bond prices across major markets, pushing 10-year gilt yields 7 basis points higher on the day to 2.77 percent. Earlier in the day the yield hit an 11-day high of 2.794 percent.
Andy Chaytor, a fixed income strategist at Nomura, said the prospects of earlier and faster rate rises in the United States were causing traders to pencil something similar in for Britain.
"The market always finds it hard to price in a radically different path for the UK compared to the U.S.," he said.
Short-sterling interest rate futures for December 2015, the most heavily traded contract, fell by more than 10 ticks on the day, and markets had brought forward expectations for a first BoE rate rise to February 2015 from March 2015.
Chaytor added that the 6 basis point rise in 30-year yields was even more striking than the move in medium-dated gilts and short sterling, as 30-year yields would normally rise by only around 3 basis points after such a change in rate expectations.
But the government's announcement on Wednesday that Britons would no longer have to convert their pension savings into an annuity on retirement had removed an important source of demand for long-dated British debt.
Chaytor said that in the short term this would only reduce annual demand for long-dated gilts by around 1-2 billion pounds.
The scale of the reaction reflected concerns that this was the start of other government moves to reduce regulatory requirements built up over the past 10-15 years for firms and investors to hold long-dated debt.
"It's a combination of reaction to the Fed plus our own idiosyncratic news," Chaytor said.
Thirty-year gilt yields peaked at a two-week high of 3.568 percent, and since Tuesday they have risen by more than 10 basis points - the biggest two-day price fall since August.
Thirty-year gilts have underperformed by around 6 basis points against German and U.S. 30-year debt since Wednesday's budget announcement.
Ten-year gilts' yield spread over Bunds widened by more than 2 basis points on the day to 113 basis points, as the U.S. interest rate outlook erased relative gains driven by Wednesday's lower-than-expected gilt issuance plans.
(Editing by Hugh Lawson)