Record bond sales 'will spook market'

The City today warned of a sharp dislocation in the bond market as Government borrowing rockets.

Economists said the UK will have to sell a record £140 billion-£150 billion of gilts this year, or 10% of gross domestic product, to cover its borrowing binge.

That is more than double the amount sold last year and well above the £80 billion the Government was forecasting in March.

That projection was increased to £110 billion following the recapitalisation of the banks.

Roger Bootle of Capital Economics said: "The increase in borrowing to record levels and any further injections of capital into the banks are likely to spook the gilt market, at least in the near term.

"If yields were to rise significantly, this could put a further dent in the public finances by raising the cost of servicing the Government's debt."

David Page of Investec said: "The deterioration in the public finances and the financing of the banking system rescue package is set to see gilt issuance explode this year.

"This risk is that you see an increase in gilt yields as supply comes through. If gilt yields start to rise it slows growth in the rest of the economy."

Gilt sales are unlikely to drop below £100 billion any time soon, according to Deutsche Bank, the world's biggest bond trader last year.

It forecast issuance of £150 billion this year, £130 billion next year, and £140 billion the year after.