A record amount of government gilt-edged stock was dumped by Britain’s pension funds, insurance groups and other institutional investors last year, fuelling anxieties over the Treasury’s ability to finance the Chancellor’s ballooning borrowing needs.

British institutions fled from the gilts market during 2008, selling a net £20.2 billion of government bonds, and dumping holdings worth £5.9 billion in the final quarter alone, official figures revealed.

The flight by institutions from gilts followed modest net sales of £400 million in 2007, and was a big reversal after purchases worth a net £19.4 billion in 2006.

Coming just a day after the first failure of a government gilts auction for seven years, and a warning from the Governor of the Bank of England over the weakness of public finances, the news highlighted the potential challenge for the Chancellor in securing the buyers needed for billions more gilts, with borrowing set to soar in the next two years.

The figures revealed that Britain relied heavily on foreign buyers of gilts, as well as purchases by its own banks, to absorb a surge in new issues of gilts last year to a record high of £92.2 billion, from just £34.1 billion in 2007.

Last year, foreign investors took up nearly half of new issues of UK government debt, buying a net total of £20.4 billion in gilts, as well as a further £10.9 billion in shorter-term Treasury bills.

Gilt issuance is set to climb still higher, to about £150 billion or more in the 2009-10 financial year just beginning.

But economists warned that demand from foreign buyers could fade just as UK institutions also seem to be reluctant investors, leaving the Treasury facing the threat of further failed gilt auctions, or having to pay higher returns to investors to boost demand.

“Overseas demand for gilts may now be weakening, and they were net sellers in January,” Michael Saunders, of Citigroup, noted.

He said that should this trend persist, and should pensions funds and other institutions also remain wary of the gilts market, this would leave the Treasury heavily dependent on further gilt-buying by banks, as well as on purchases by the Bank of England under its “quantitative easing” programme.

The official figures gave no explanation for the sell-off in gilts by British institutions, but Mr Saunders suggested that an explanation might lie in a drying-up of cash inflows to pension and life funds, triggered by tumbling dividend payments by UK and overseas companies hit by worsening economic conditions. Inflows of capital into pensions and life funds swung from £50.6 billion in 2007 to net outflows of £13.8 billion last year.

Irish woes

— Ireland’s economy sank deeper into recession in the final quarter of last year, registering its worst slump since 1947

— Irish GDP plummeted by 7.1 per cent in the final three months of last year, to stand 7.5 per cent down on the same quarter a year earlier, much worse than expected, official figures showed

— The precipitous fall in overall GDP was driven by a plunge in consumer spending and in the profits of foreign multinationals based in the Republic

— GNP data, which exclude foreign corporate profits and are seen as a better gauge of Ireland’s domestic economy, showed a 2.2 per cent fall in the final quarter of 2008, and a 6.7 per cent annual drop

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