GILT futures pared early gains today as initial optimism that the Conservatives could form a workable government gave way to fears about prolonged post-election uncertainty.
Traders woke up to news that the closest election in decades remained too close to call, with initial results suggesting the Conservatives would be the largest party but fall short of a parliamentary majority.
Markets reacted to the news that Nick Clegg, the leader of the Liberal Democrats, indicated he would be willing to work with the Conservatives, but investors remained sceptical that a stable administration could be formed, raising prospects of a sustained attack on British assets.
Government bond and equity futures were open for a specially extended trading session to allow investors to react to the election results as they came in.
Citigroup’s Mark Schofield said the yield on the 10-year UK gilt could go back up to 4.25 per cent. Some analysts even see gilt yields rising as high as 4.75 per cent.
Investors were worried that an inconclusive election outcome could make it harder for an incoming government to pass legislation to cut a budget deficit running at more than 11 per cent of GDP. Britain needs to sell more than £185bn of gilts this fiscal year at a time when the Bank of England is no longer buying gilts for its quantitative easing programme.
City A.M. Reporter