Global Rates: Central bank purchases, deep recession and disinflation will push down on yields – Following revisions to our base case for the global economy to incorporate a deeper recession and slower recovery (see here) and a wave of government and central bank announcements, we present updated rates forecasts in today’s note (see table below).

We remain of the view that core eurozone bond yields and US Treasury yields will decline. Although the government announcements imply large amounts of extra supply, we think that the impact on yields will be more than offset by central bank purchases, the deep recession and eventual disinflation. US fiscal measures imply around USD 800bn of extra funding. At the eurozone level, we currently estimate around EUR 360bn of extra issuance. This reflects a combination of cyclical deterioration and discretionary fiscal stimulus. These amounts will almost certainly rise. Even more supply is likely on the cards. Having said that, our judgement is that the central banks will do what it takes to stem and reverse the profound tightening of financial conditions. Indeed, after signalling at least USD 700bn of asset purchases initially (USD 500bn of US Treasuries), the Fed has now pledged unlimited asset purchases (see below). Following the announcement of the EUR 120bn additional envelope and EUR 750bn PEPP, the ECB has signalled a willingness to do whatever is necessary, even if this involves raising issuer limits.

We expect eurozone country spreads (10y yields versus their German counterparts) to remain elevated over the next 3-5 months. Deteriorating macro expectations, the risk-off environment and increasing supply will put upward pressure on spreads, but we think that the ECB will push hard in the other direction with asset purchases. It can do this using the APP and PEPP, however re-launching the OMT has also become a possibility over recent days. We judge it will do whatever is necessary. Later in our horizon, as growth expectations and risk sentiment turn positive, we expect country spreads to head lower. Finally, we expect asset swap spreads to widen over the next few months. This reflects the combination of ECB asset purchases and risk-off sentiment, both of which should put upward pressure on spreads.