Yields on U.K. government bonds, or gilts, climbed to multiyear highs due to a combination of global and domestic factors.

Ten-year gilt yields hit 5.294% on Wednesday, the highest since 2007, LSEG data showed. Thirty-year gilt yields rose to 5.921%, the highest level since 1998.

Inflation concerns due to elevated global energy prices are currently the main drivers of gilt yields. Fresh U.S.-Iran hostilities have caused oil prices to surge, driving up inflation risk and raising the prospects of central banks, including the Bank of England, increasing interest rates in the coming months.

"Every $10 per barrel that oil prices go up, you see about 50 basis points or more hiking being priced in for the Bank of England," Michiel Tukker, senior U.K. and eurozone rates strategist at ING, said.

Traders fully price in a one-quarter point BOE rate hike by the end of 2026, LSEG data show.

Gilt yields are also highly correlated with U.S. Treasury yields, and the recent rise in Treasury yields is causing yields on U.K. government bonds to accelerate.

Rising U.K. borrowing costs also intensify concerns about the U.K.'s already-stretched public finances ahead of the budget on Oct. 28.

"Current moves in financial markets are clearly set to further erode the government's fiscal headroom at the upcoming budget," Handelsbanken's senior U.K. economist, Daniel Mahoney, said in a note.

U.K. public spending may not increase significantly, but there is a tail risk that if the government tries to expand fiscal policy, this could add inflationary pressures to the economy, ING's Tukker said.

The latest public sector finance data showed government borrowing was 1.8 billion pounds ($2.43 billion) in July, 69% higher than in the same period a year ago and above the forecast by the fiscal watchdog, the Office for Budget Responsibility.

"This rise in yields, which will eat directly into the government's fiscal headroom, raises the risk of tax hikes in the autumn, even before accounting for any additional spending increases that [U.K. Prime Minister] Burnham seems likely to pursue," Matthew Ryan, head of market strategy at Ebury, said in a note.

Meanwhile, high uncertainty around the Middle East conflict and domestic pressures are causing gilt investors to exercise caution, ING's Tukker said.

"A lot of investors are staying away from taking big positions in gilts even though yields are very high."