UK gilt yields fall sharply in wake of Trump trade tariffs

LONDON, April 4 (Reuters) - Short-dated British government bond yields tumbled on Friday in the aftermath of U.S. president Donald Trump's sweeping import tariffs that extended a global market selloff, as traders increased bets on further Bank of England interest rate cuts.

Two-year gilt yields GB2YT=RR fell to 3.923% at 0821 GMT, the lowest since September 25 and down about 9 basis points on the day. Five-year yields GB5YT=RR touched their lowest since October 22 at 3.976%.

The yield on the 10-year government bond was its lowest since February 6.

Britain's government said it was confident it could reach a trade deal with the United States after Trump imposed 10% tariffs , one of the lowest among a dozen of countries and lower than the 20% imposed on the European Union.

But the levies have heightened concerns about growth and inflation.

"UK exports will be hit by those taxes, but the British government is steadfastly resisting retaliation so far, which -combined with higher cable - leaves the growth and inflation picture slightly weaker, for now," economists at Pantheon Macroeconomics, said in a note on Thursday.

"We doubt the UK government will be able to maintain minimal retaliation if the EU responds more forcefully, given the need to cooperate on other issues like defence, and the complex position of Northern Ireland post-Brexit."

Britain's economy unexpectedly contracted at the start of the year, and a Bank of England has been closely monitoring the persistence of price pressures.

Pantheon Macroeconomics estimates the 10% tariff on UK goods exports to the United States will reduce gross domestic product by 0.2 percentage points.

Interest rate futures on Friday pointed to an expectation of around 78 basis points of reduction in the BoE's benchmark Bank Rate by December, compared with around 64 bps on Thursday.

The chance of a quarter-point rate cut at the BoE's next scheduled meeting on monetary policy in May was seen at about 87%, also up from Thursday.