Gilt futures rose today after a poll by the Daily Telegraph said the Conservatives are on course for a "convincing election victory".
Investors bought government bonds on hopes that David Cameron's party would cut the country's ballooning deficit quicker than a Labour government, if they win the forthcoming 6 May general election.
"Only a strong Conservative majority is likely to deliver large and early fiscal tightening," said Citigroup in a note to investors. "And in the absence of such a result the MPC [the Bank of England's monetary policy committee] may be forced to raise rates quicker than many expect to head off the incipient inflation threat."
Yields of 10-year government bonds, which move in the opposite direction to prices, rose to 4.014%, more than the 3.13% that Germany has to pay to lure investors.
Yields could push up to as high as 5% if Gordon Brown wins another term, or if he is forced into an alliance with the Lib Dems, Citigroup said.
"Gilt yields look vulnerable to further upward pressure on both fiscal and monetary concerns under any scenario other than a strong Conservative majority," the bank said in a note to investors.
Whereas the Bank of England determines short-term interest rates, gilt yields are often used by lenders as a guideline for longer-term rates, including 20 to 30-year mortgages.
