Don't sit on cash as credit is 'screaming buy', says BNP Paribas

In credit research published today, BNP Paribas advises pension funds and insurance companies against holding onto cash and watching bund levels for higher yields to buy credit. There is not much to gain from sitting on the sidelines, say strategists, whereas relative value investors should view credit as a ‘screaming buy’ at current valuations.

BNP argues that the market is entering an age of austerity whereby absolute yield levels are carving out a new lower range of bund and credit yields. With single-A credits providing 3.2% and triple-Bs only 3.99%, credit yield levels do not appear appealing to absolute yield seekers.

Having said that, in an age of austerity when growth will hover around 1% and inflation will remain below 1%, a 4% yield on triple-Bs is a very attractive return. When viewed from a credit spread / bund yield ratio basis, credit is almost back to crisis levels seen during the refinancing crisis of November 2008. With non- financials facing no significant refinancing risk this year, analysts believe that bund yields look extremely rich and conversely investment grade credit offers significant value. Waiting for bund yields to rise is akin to waiting for a spread rally as they are co-incidental events under a normalisation scenario.