UK 30-year gilt yields rise to highest since 1998 before local elections

LONDON, ​May ⁠5 (Reuters) - British 30-year government bond yields rose ​to their highest in nearly 28 years on Tuesday as part of a broader selloff in gilts ahead ​of ‌local elections this week.

Thirty-year gilt yields peaked at 5.787% at 1133 GMT, up more than 14 basis ⁠points from Friday's close after a public holiday on ⁠Monday when U.S. and German ​yields rose on continued disruption to shipping in the Strait of Hormuz. Thirty-year gilt yields were last higher in May 1998.

Benchmark 10-year gilt yields - which are more reflective of new public debt ​issuance ‌costs - rose 14 bps, pushing past the 5% level to 5.105% and on track for their highest close since 2008.

Investors are closely watching local elections on Thursday which may add to pressure on Prime Minister Keir Starmer and raise questions about Britain's future fiscal ​policy if he is replaced as leader of the Labour Party.

"Any sign of instability around ‌Prime Minister Keir Starmer or pressure on Chancellor Rachel Reeves immediately feeds into concerns about whether fiscal discipline could weaken," Nigel Green, chief ‌executive of financial advisors deVere Group, said.

"If Labour suffers a heavy defeat and internal divisions intensify, gilt markets will start assigning a higher probability to looser fiscal policy, whether ​through increased spending, diluted rules, or political concessions."

Financial markets were pricing nearly three interest rate hikes by the Bank ‌of England by the end of 2026 as the latest spike in oil prices, caused by the war in Iran, fuels inflation concerns.

Last week markets scaled back rate rise expectations ⁠after Governor Andrew ⁠Bailey said there were a range of possible paths for ‌rates and that he was not signalling that rates would definitely rise.

Britain is seen as more exposed than ​many other European countries ​to an energy-price shock due in part to weak ‌public finances which could come under further strain if the government seeks to soften the hit for power users.

Short-dated gilt yields also jumped, with the two-year yield pushing 14 bps higher at 4.569%. (Reporting by Suban Abdulla; editing by David Milliken)