British government borrowing costs surged to their highest since the 2008 financial crisis on Friday, as investors scrambled to price in rising inflation risks and a growing probability of interest rate hikes later this year.

U.K. government bonds – known as gilts – have undergone a sharp repricing amid the escalation of the Iran war. Yields on the benchmark 10-year gilt have jumped around 68 basis points in the 15 trading days since the conflict began, while the yield on the 2-year gilt has added about 97 basis points.

Bond prices and yields move in opposite directions.

On Friday, the yield on the U.K.’s 10-year government bonds moved around 9 basis points higher to 4.933%, its highest level since the 2008 financial crisis.

Meanwhile, yields on 2-year gilts jumped 11 basis points to around 4.513%, marking their highest level in more than a year.

Britain’s bond market has been particularly susceptible to fears of resurgent inflation as the U.S.-Iran war drags on, in part because of its reliance on imported energy. The war, and the subsequent blockade in the Strait of Hormuz – a critical oil shipping route – has led to a surge in oil and gas prices.

Even before the war broke out, the U.K. had the highest government borrowing costs of any G7 nation, with long-term 20- and 30-year gilts trading well above the crucial 5% threshold. The yields on those bonds jumped by around 9 and 7 basis points, respectively, on Friday.

Nigel Green, CEO of financial advisory deVere Group, told CNBC markets were rapidly unwinding expectations of rate cuts from the Bank of England.

On Thursday, the central bank’s Monetary Policy Committee said it had voted “unanimously” keep its benchmark interest rate on hold, saying inflation would be higher in the near term “as a result of the new shock to the economy.”

Before the war began, the BOE had been expected to cut its key interest rate. Now, markets are pricing in a near 0% chance of a rate cut from the bank this year, with the vast majority of traders seeing a rate hike next month, LSEG data shows. Markets are also overwhelmingly pricing in a key rate of at least 4.25% by the end of the year, which would suggest a minimum of two rate hikes.

“The trigger is energy, as oil and gas shocks are feeding directly into inflation expectations, and gilts are reacting exactly as you would expect in this scenario,” deVere’s Green told CNBC via email. “This isn’t a disorderly sell-off — it’s an understandable repricing of risk.”

There was “also a political layer” to movements seen in gilt markets, according to Green.

“Finance minister Rachel Reeves has built her fiscal framework around stability and credibility, but higher yields quickly translate into higher borrowing costs,” he said. “This, of course, narrows her room for maneuver at precisely the moment pressure is building for additional support on energy and households.”

The bond market has largely been supportive of Reeves’ commitment to her so-called “fiscal rules” during her tenure as finance minister, with speculation that she may be fired from the job last year triggering a gilts sell-off.

Adding to selling pressure on Friday, official figures showed the UK government borrowed a higher-than-expected £14.3 billion ($1.74 billion) in February.

Reeves has committed to bringing day-to-day government spending to a level where it can be funded by tax revenues rather than borrowing, with her rules also saying that public debt must be falling as a share of economic output by 2029-30.

“From an investment perspective, higher yields are starting to restore value in parts of the curve,” Green added. “But volatility will remain elevated while energy markets dictate the inflation outlook.”

George Godber, Fund Manager, Polar Capital U.K. Value Opportunities Fund, told CNBC’s “Squawk Box Europe” on Thursday that his team was avoiding any knee-jerk reactions to the news flow around the conflict.

“The duration of this impact is deeply unknown … In these times, history would tell you the best thing to do is keep calm,” he said. “What we’ve done is very little.”