LONDON, Sept 10 (Reuters) – British government borrowing costs rose to multi-decade highs on Thursday as a spike in attacks on shipping in the Middle East and robust U.S. data boosted expectations of interest rate hikes and triggered a sharp selloff in debt markets.

Gilt Yields and Market Reaction

Ten-year gilt yields jumped by 10 basis points to 5.378%, their highest since July 2007, a level last seen on the eve of the global financial crisis, adding to the pressure facing new finance minister John Healey ahead of his first annual budget statement next month.

Yields on 30-year and 20-year debt – which make up a smaller share of new British government borrowing – reached their highest since 1998 at 5.948% and 5.895% respectively.

Global Factors Driving the Surge

Borrowing costs rose across advanced economies on Thursday, extending increases earlier driven by a rebound in oil prices which topped $105 a barrel on Thursday – a level last reached in May – after Yemen’s Iran-aligned Houthis seized a port.

Investor Sentiment and Structural Shifts

“Steamy energy prices appear to be the trigger for these latest moves higher in yields, but there’s been an underlying structural shift in the global flow of money for some time as some of the world’s biggest institutional investors rotate away from (U.S.) Treasuries to seek returns in corporate debt,” said Susannah Streeter, chief investment strategist at Wealth Club.

Short-Dated Gilts and Interest Rate Outlook

While longer-dated gilt yields moved broadly in line with U.S. Treasuries, there was a sharper rise in short-dated gilt yields that are more sensitive to the outlook for interest rates and inflation.

Bank of England Policy Expectations

BANK OF ENGLAND IS EXPECTED TO HOLD RATES

Unlike the European Central Bank, which undertook a long-expected rate rise on Thursday, the Bank of England is predicted to keep rates steady after next week’s rate meeting.

Market Bets and Yield Movements

But market bets for a BoE move in November have risen and it is priced in as a 97% probability – despite Governor Andrew Bailey telling a parliament committee on Tuesday that such a move would only happen if British inflation pressures intensified more than he thought likely.

Five-year gilt yields recorded their biggest one-day rise since May 15, up 15 bps on the day to a three-year high of 4.95%. Two-year gilt yields rose a similar amount to their highest since October 2023 at 4.87%.

Recent Gilt Auctions and Historical Context

Earlier in the day the UK Debt Management Office sold £5 billion ($6.78 billion) of 4.625% May 2030 gilts at an average yield of 4.786%, the highest for a gilt in that maturity range since October 2023.

On Tuesday, benchmark 30-year gilts sold at a syndication with the highest yield since at least 1998.

($1 = £0.7377)

(Reporting by David Milliken, editing by Andy Bruce, Andrew Heavens and Barbara Lewis)

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