28 DAYS LATER: IS THE INTEREST RATE REPRICING EXCESSIVE?

To mitigate the negative effects of the coronavirus epidemic on global growth, address inflation expectations and, also, bolster the equity markets , central banks are expected to roll out the big guns. The Fed decided to cut its Fed Funds rates by 50bp and more actions are expected for the US central banks and its peers. Nearly two 10bp cuts are priced in Europe while the BoE would slash its base rate by at least 25bp . A ccording to our economists, the Fed will cut by another 25bp in June while the BoE will act late March (-25bp cut ). On the other hand, the ECB will wait until the end of April before taking action , and will announce a package that will include a 10bp drop in the deposit and an increase in net purchases by the APP (from 20bn to 40bn). The multiplier applied to the liquidity tiering system in the euro zone would increase from 6 to 7 to limit the negative effects of the drop in deposits on banks. However, w e don’t think central banks will deliver all expected cuts , which implies more of a bearish bias with respect to current expectations . However, it is mainly in the second year that this bearish repricing phase (especially bear steepening) should appear. $ and € long rates could thus rise slightly between now and the end of the year with a potential increase of around 35- 40bp over the 10-year maturity . The increases in short rates being limited (rather 10bp), the slopes 2-10 years $ and € should therefore become steeper between now and the end of the year (mainly in H2 ). Barring a worst-case scenario, sovereign and corporate spreads should benefit from the ECB's announcements and thus return to levels similar to those prevailing before the Coronavirus epidemic. Thus, we expect the 10-year BTP-Bund spread to return to a level of 130bp by the end of June.