UK bonds hit by fear of hung parliament

David Cameron's falling poll numbers are cooling demand for UK government bonds on fears that a hung parliament could hinder any new government from dealing with Britain's soaring budget deficits.

The general election is expected to be called for May 6, though some reports have the Labour government pulling it forward to April to exploit a closing gap in the opinion polls. ICM's latest survey put the Tories on 39 per cent, only nine points ahead of Labour, with the Lib Dems on 20. It is the first poll since last summer to put the Conservatives below 40 per cent The result would leave the Tories 14 seats short of an overall majority.

According to the Financial Times, UK bonds have sharply under-performed those of Germany since November when the prospect of a hung parliament emerged. Although analysts say other factors are also battering the market in British debt - including the end of emergency stimulus financing - concerns that the new government may not have sufficient legislative muscle or is unwilling to take the actions necessary to restore a measure of fiscal health are a key factor.

"If a new government does not act swiftly to cut the budget deficit, there is a real danger the markets will sell off," says HSBC's Steven Major.

While the markets focus on deepening concerns in the Eurozone over potential Greek and Portuguese debt default, holders of UK bonds have grown nervous. Last month Bill Gross, managing director of the bond giant Pimco, said the gilt market had nitroglycerine under it because of the UK's vast debt burden.

Says Alan Wilde at Baring Asset Management: "I think most investors would want to see the Conservatives win a majority, as they would more likely implement the most draconian measures that are necessary to reduce debt levels. But the most important thing is a decisive victory."