Britain issues costliest 5-year debt since 2008 before budget

By David Milliken

LONDON, Oct 27 (Reuters) - Britain sold £4.5 billion ($6.0 billion) of 5-year debt on Tuesday, paying an average yield of 5.036%, the highest since 2008, and showing the bond market pressure on finance minister John Healey before his first annual budget on Wednesday.

Investors bid for 3.51 times the volume on offer of the 4.625% March 2032 gilt, the UK Debt Management Office said, typical of the strong demand for British government bonds this year.

Bond yields have surged across advanced economies since the start of the US-Iran war, pushing up the cost of new government borrowing, as investors fear higher inflation and debt issuance due to the jump in energy prices.

Earlier this month, 20- and 30-year gilt yields hit their highest since 1998, while 5- and 10-year yields reached their highest since 2008.

Gilt dealers polled by Reuters last week expect only a modest increase in debt issuance this financial year after the budget, pencilling in a median £3.4 billion rise in gilt sales and a £5 billion increase in net sales of Treasury bills.

But they see a chunkier £27 billion rise in the country's gross financing requirement for 2027/28, compared with the last official forecast in March, to £334 billion. They also expect long-dated gilt issuance this year to fall to its lowest since 1990/91 as the DMO targets cheaper shorter-dated financing.

In March, before most of the rise in gilt yields, the UK 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.

($1 = 0.7505 pounds)

(Reporting by David MillikenEditing by William Schomberg)