The UK sold 20-year inflation-linked debt at the highest borrowing costs in more than 20 years in an environment of rising bond yields.

The Debt Management Office (DMO) said on Thursday that it had carried out its latest bond auction to raise £800 million of inflation-linked gilts at a yield of 2.41 per cent, the highest on that type of asset since 2001.

Inflation-linked gilts, known as “linkers”, are pegged to the UK’s retail price measure of inflation and protect against price rises by adjusting the bond’s principal and coupon in line with inflation.

Investors have been dumping government bonds across the developed world amid fears over inflation, high interest rates and rising debt burdens.

The UK’s 30-year gilt yield hit a fresh 27-year peak on Tuesday but bond prices have since rallied. Yields on long-term bonds fell another 0.02 percentage points on Thursday to 5.59 per cent after hitting a high of 5.74 per cent earlier in the week. Equivalent bond yields in Germany, France and America also fell back from recent highs. Yields rise when a bond’s price falls.

The UK’s latest gilt auction attracted strong investor interest, with the £800 million inflation-linked issuance receiving bids in excess of £3 billion. The DMO said this was the highest bid ratio on linkers since 1998. On Tuesday, the DMO issued a conventional ten-year gilt which was also in demand, generating bids of more than £140 billion.

Bond investors are snapping up UK debt in an environment of rising long term interest rates, where the government is having to pay a premium to issue bonds. This week’s ten-year gilt auction was sold at the highest yield since the financial crisis in 2008. Bonds pay a fixed coupon to investors.

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Andrew Bailey, governor of the Bank of England, said this week it was important not to “exaggerate the 30-year bond rate” as it is not a financial instrument that reflects key financial products such as mortgages.

The Office for Budget Responsibility, the UK’s independent fiscal watchdog, uses average 20-year borrowing costs in its forecast calculations. The importance of 30-year bonds has also waned due to falling demand from defined benefit pension funds which were important buyers of long-dated gilts but have now largely closed.

Bailey said global factors were largely behind the gilt sell-off but admitted that the Bank’s gilt sales to investors would have to take account of market conditions.

Gilts and UK stocks rallied as the pound dripped by 0.1 per cent against the dollar to $1.34 and gained 0.12 per cent against the euro to €1.15.