Britain sold £4.5 billion of five-year government debt on Tuesday at an average yield of 5.036%, the highest for five-year borrowing since 2008, the UK Debt Management Office said, in a sign of bond-market pressure on Chancellor John Healey hours before his first Budget.

Investors bid 3.51 times the volume on offer of the 4.625% March 2032 gilt, strong demand at a price that shows how far borrowing costs have risen. Reuters reported that bond yields have surged across advanced economies since the start of the US-Iran war, as investors fear higher inflation and debt issuance driven by higher energy prices. Earlier in October, 20- and 30-year gilt yields hit their highest since 1998, while five- and ten-year yields reached their highest since 2008.

What dealers expect next

Gilt dealers polled by Reuters last week expect only a modest rise in debt issuance this financial year, a median £3.4 billion rise in gilt sales and a £5 billion increase in net Treasury bill sales, but a chunkier £27 billion rise in the gross financing requirement for 2027/28, to £334 billion, against the last official forecast in March.

In March, before most of the rise in gilt yields, the Office for Budget Responsibility predicted Britain would spend 3.8% of national income servicing public debt by the end of the decade, nearly twice as much as in the 2010s. Healey delivers his Budget on Wednesday 28 October at about 12.30pm, after Prime Minister's Questions.

Sources: Reuters and the UK Debt Management Office.