UBS: GBP bonds offer good entry levels

As expected, the Bank of England raised its base rate to 5.5%, as economic growth remained firm and inflation risks tilted to the upside. Even though annual inflation (CPI) fell to 2.8% in April, down from March’s 3.1%, the Bank’s tightening bias has been justified by the quarterly inflation report, which sees inflation coming in above target, suggesting another rate hike in the next few months. Consequently, analysts at UBS AG now forecast a rate hike to 5.75% in July, placing UBS slightly below market expectations.

At the short end of the yield curve, Angus Pearson, UBS analysts sees room for money market rates to gain about 10 basis points or so. However, at the long end, after the recent upward shift in the 10-year Gilt yield of nearly 0.25% since the end of March, UBS believe yields have peaked.

“We remain less optimistic on the medium-term growth outlook than the Bank of England, and we expect the bank to cut rates in the second half of 2008. We would now assert that GBP bonds offer good entry levels and represent a strong alternative to UK equities from a risk-adjusted perspective,” concludes UBS.