Britain has announced a record £80 billion (€101.72 billion) of gilt sales this year but a fast deteriorating economy and strained public finances mean it may end up tapping the market for even more.

Figures for the first quarter of the financial year show public borrowing is already £10 billion higher than at the same point last year.

Since the finance ministry has pencilled in an increase of £8 billion for the entire year and much of the damage of the credit crunch has yet to be felt, there is a strong risk that issuance forecasts contained in the March Budget will be revised higher. Owen Roberts at Morgan Stanley reckons gilt sales this year could be as much as £14 billion higher than previously estimated.

The prospect of a supply surge is not unique to the gilts market. Governments around the world are looking again at fund-raising plans as slowing economies eat into tax revenues and raise social security spending. Nonetheless, the speed of the deterioration in Britain's economic outlook combined with the government's apparent willingness to re-write its fiscal rules makes the gilt market particularly vulnerable.

"The risk to gilts certainly appears higher than in the eurozone at the moment," said Morgan Stanley's Roberts. "People are starting to price this in, but there is probably a lot further to go."

Increased government bond supply normally steepens the yield curve and tightens swap spreads. Mr Roberts reckons the sterling swap spreads should tighten by about six basis points for each additional £10 billion of issuance.

Since mid-July, swap spreads have narrowed by between three-and-a-half-basis points in the short end of the curve.

Supply considerations would also argue for gilt underperformance relative to Germany's benchmark Bunds. So far, however, there has been little sign of this happening as interest rate differentials have remained the dominant driver of relative value trades.

"We would prefer to play supply risks via the swap market than via Gilt-Bund spread trades where they are so many other factors to consider," said Moyeen Islam, gilts strategist at Barclays Capital.

Government bonds tend to find favour in an economic downturn, but it is far from certain that demand will be able to keep pace with supply. Low growth is normally accompanied by low inflation, boosting the appeal of fixed income investors. This time round inflation is rising, and is expected to stay stubbornly high for some time.

There are also concerns that the recent fall in the value of the sterling may deter foreign investors.

Overseas central banks and sovereign wealth funds have been voracious buyers of gilts in recent years as governments have sought to diversify their foreign exchange reserves away from the dollar.

At the end of last year, more than 33 per cent of British government bonds were in foreign hands, up from just 18 per cent in 2002. But this proportion has held steady so far this year, suggesting demand may have plateaued.

Figures from the International Monetary Fund show the sterling accounted for 4.7 per cent of global central banks' currency reserves in the first quarter, little changed from the previous quarter.

"It is reasonable to question whether foreign demand will continue to rise, particularly given the loss of confidence in the UK economy," said Michael Saunders at Citi.

The British government's admission that it may relax restrictions on the amount of debt it can take on may also make potential gilt investors think twice.

While eurozone governments are bound by the European Union's Stability and Growth Pact, which imposes penalties when the rules are broken, Britain has a self-imposed fiscal framework. Its "sustainable investment rule" currently requires debt to remain below 40 per cent of GDP, but there is nothing to stop it from raising that threshold.

With an election less than two years away and an economy crying out for fiscal stimulus, the government may well decide that changing its rules is the least-worse option.