Recasts, adds economist coment

By David Milliken

LONDON, April 7 (Reuters) - British government bond yields surged on Monday, reversing a big drop earlier in the day and tracking U.S. Treasury yields higher amid speculation that U.S. President Donald Trump might pause the imposition of tariffs .

Thirty-year gilt yields GB30YT=RR were at one point 25 basis points higher on the day and at 1530 GMT were up 21 bps at 5.34% - the type of move last seen in October 2022 after former Prime Minister Liz Truss' failed "mini-budget".

Unlike in 2022, the move in gilts largely paralleled that in Treasuries as investors struggled to digest the economic implications of U.S. tariffs announced last week and how much chance there is that Trump might suspend them.

"A disorderly breakdown in market functioning – which might not be far away - could see the Fed pivot to providing liquidity support. But we worry that, absent that, the Fed may struggle to deliver the aggressive easing priced by the market," said Paul Diggle, chief economist at British fund manager Aberdeen.

Financial markets see a near 100% chance that the Bank of England will cut rates at its May meeting - up from 50% before Wednesday's tariff announcement - and three quarter-point rate cuts between now and the end of 2025.

Earlier on Monday, British two-year government bond yields GB2YT=RR hit their lowest since September 2024 at 3.811%, down 12 bps on the day. But at 1530 GMT they were 9 bps higher on the day at 4.03%.

The rise in yields persisted even after the White House denied a report that Trump was considering a 90-day pause in tariffs for all countries except China.

Almost all economists think Trump's tariffs will be negative for growth in the United States and Britain, but there is less consensus about the medium-term implications for UK inflation and government borrowing, which risk being negative for gilts.

Prime Minister Keir Starmer, asked on Monday if the economic turmoil might prompt finance minister Rachel Reeves to suspend plans to reach a balanced current budget by 2029/30, said a change in the rules should not be her first response.

(Writing by David Milliken and William Schomberg; Editing by Kate Holton and Sarah Young)

((william.schomberg@thomsonreuters.com; +44 207 542 7778; Reuters Messaging: william.schomberg.reuters.com@reuters.net))