Latest / Bloomberg Intelligence / Eaton Vance's Stein: Flatness of Yield Curve Not Healthy(Audio)

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Eaton Vance's Stein: Flatness of Yield Curve Not Healthy(Audio) · Bloomberg Intelligence

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  Speaker 1: gain of one and a half percent. I'm Charlie. Look,
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  Speaker 1: that's a bloom Bird business flash. He's taking stock The
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  Speaker 1: FED in focus on Bloombird Radio stimulative central banks around
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  Speaker 1: the globe. This has put a nice solid floor under
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  Speaker 1: the U S stock market is certainly helping to drive
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  Speaker 1: not only the US bond market up in price down
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  Speaker 1: in yeld at bond markets around the world. The ECB,
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  Speaker 1: the European Central Bank starting its purchases of corporate bonds
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  Speaker 1: today and this is just adding fuel to the fire.
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  Speaker 1: Joining us now, Eric Stein, he's co director of Global
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  Speaker 1: Income and portfolio manager at Eton Vance. He joins us
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  Speaker 1: from Boston as we put the Fed and central banks
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  Speaker 1: in focus here. Welcome to the show. Thanks for having me.
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  Speaker 1: So um, I guess it's just another one of the
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  Speaker 1: bazooka type weapons that Mario Dragging has promised. This The
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  Speaker 1: question is how effective it will be in stimulating economy. Yes,
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  Speaker 1: you know, I think what we're seeing today with the
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  Speaker 1: first day of corporate bond purchases. This is announced, you know,
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  Speaker 1: back in March, and it takes a little while for
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  Speaker 1: the central friendI central bank in this case, the ECB
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  Speaker 1: to kind of get their operational house and order and
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  Speaker 1: now they're buying corporate You know, we have seen pretty
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  Speaker 1: big rallies and corporate bond spreads both high yield and
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  Speaker 1: investment grade in Europe since the announcement of the so
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  Speaker 1: called announcement effects so it's not just on the day
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  Speaker 1: of purchases, it's also when the announcement happens. Eric, is
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  Speaker 1: there any evidence that this strategy works? So, you know,
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  Speaker 1: I think to me, it's always you know, look at
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  Speaker 1: the counter factual. If you weren't doing this with the
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  Speaker 1: European economy be in a better situation, I'd argue not.
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  Speaker 1: You know, certainly, you know, there's debates about the effectiveness
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  Speaker 1: of you know, que when we when the FED was
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  Speaker 1: doing it here in the US, and with Europe where
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  Speaker 1: most of their you know, financing is bank let not
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  Speaker 1: capital markets lad like we have in the US, it's
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  Speaker 1: probably gonna be even harder, um for for the QI
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  Speaker 1: to actually feed through the real economy. That being said,
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  Speaker 1: they need to try, given that the European Central Bank
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  Speaker 1: there's nowhere close to the two percent inflation there are
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  Speaker 1: you know, maybe a little bit overblown, but I think
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  Speaker 1: at least a couple of months ago some legitimate deflation
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  Speaker 1: fears in Europe. Unemployment is still significantly significantly higher than
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  Speaker 1: the US. They have to do something and so this
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  Speaker 1: is really a way that Dragging and his colleagues at
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  Speaker 1: the ECB can do the best they can to to
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  Speaker 1: jump start the credit markets. Is the financial plumbing clogged
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  Speaker 1: up within the banks? Though? Do the do Europe's banks
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  Speaker 1: need to do some cleaning up of their balance sheets
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  Speaker 1: before they're healthy enough to actually start lending more and
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  Speaker 1: fire up the capital markets. I think it would certainly help.
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  Speaker 1: I mean, I think if you look at you know,
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  Speaker 1: what did US banks do in two thousand and eight
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  Speaker 1: and two thousand nine. We have the stress tests. They
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  Speaker 1: were much maligned at the time, but they ultimately worked.
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  Speaker 1: The US banks raised capital, help cleanse the system and
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  Speaker 1: really got things going. And as as as I said before,
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  Speaker 1: US is more capital markets left well in Europe, where
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  Speaker 1: the banks are even more important. It's about two thirds
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  Speaker 1: of credit is bank led versus capital markets led. In Europe,
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  Speaker 1: it's the opposite in the US. They haven't done that. Yes,
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  Speaker 1: there have been some stress tests, Yes there's been some
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  Speaker 1: opital raising um, but by and large, the European banks
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  Speaker 1: to me are in you know, nowhere near is going
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  Speaker 1: to shape as US banks. So I think that's part
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  Speaker 1: of the problem. Longer term, certainly lots of regulators in
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  Speaker 1: Europe one and more capital markets led credit system. It's
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  Speaker 1: going to take some time to get there. Um, but
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  Speaker 1: I certainly think you know the point of your question,
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  Speaker 1: the problem with European banks is somewhat leading to some
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  Speaker 1: issues in terms of credit intermediation. Eric, do you believe
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  Speaker 1: that higher rates would encourage people in institutions to lend money?
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  Speaker 1: Why lend money to anyone or anything if you're going
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  Speaker 1: to get nothing in return? So, I look, I think
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  Speaker 1: that's a very good question. I think you know, in
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  Speaker 1: terms of I think it's still an open question when
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  Speaker 1: when yields are as low as they are in negative
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  Speaker 1: in in many countries in Europe and many parts of
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  Speaker 1: the yield curve, I think a lot of the traditional
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  Speaker 1: relationships that we think about in economics and with interest
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  Speaker 1: rates and the lower rates are going to spur more
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  Speaker 1: borrowing and more lending, uh, you know, may not be true.
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  Speaker 1: I also think the flatness of the curves that we
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  Speaker 1: see global is problematic. It's not good for banks. Help
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  Speaker 1: to you, if you have a flatter curve, it's not
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  Speaker 1: good for bank profitability. Means that the credit channel is
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  Speaker 1: more stuck in European banks. I think it also sends
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  Speaker 1: a lack of confidence signal um to have a flatter curve.
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  Speaker 1: So I actually think central banks would be better off
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  Speaker 1: having deeper curves the rate um. The rates that we
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  Speaker 1: have are low enough. It's other things trying to get
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  Speaker 1: the so called animal spirits out there, which is what
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  Speaker 1: what is more needed than ever lower interest rates. And
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  Speaker 1: of course I would argue that if you start raising rates,
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  Speaker 1: the key rates, the FED funds, overnight type rates, you
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  Speaker 1: would ultimately make spur the rally in the long and
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  Speaker 1: more if people think that the Fed's tightening prematurely and
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  Speaker 1: that's going to slow down the economy. But to that point,
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  Speaker 1: this this rally seems to be heating up again. Is
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  Speaker 1: it's going to continue down to one point seven zero?
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  Speaker 1: It was trading just a little bit about one point
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  Speaker 1: six nine on the benchmark US tenure note? Can that
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  Speaker 1: head down to one point six? Can I head down
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  Speaker 1: to one point five? Or is is it like it?
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  Speaker 1: Certainly could, you know, in a in a world of
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  Speaker 1: negative central bank yields and a lot of fear, it
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  Speaker 1: certainly could. But keep in mind, you know, yields of
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  Speaker 1: anything where we're kind of flat to going up a
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  Speaker 1: little bit, and then we had the you know, far
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  Speaker 1: weaker and expected payroll report on Friday. Some of the
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  Speaker 1: data turns that could turn yields a little bit. I
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  Speaker 1: also think the whole Brexit issue out there is a
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  Speaker 1: lot of uncertainty weighing on the markets where a lot
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  Speaker 1: of money is in very safe assets, and so you know,
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  Speaker 1: right now the trend seems to be flat or lower
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  Speaker 1: on these bond yields. I don't think it really takes
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  Speaker 1: sense from a longer term perspective, especially given that you know,
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  Speaker 1: inflation in the US, as much as no one wants
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  Speaker 1: to talk about at wage, inflation is picking up a
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  Speaker 1: little bit. Oil seems to go up in our fifty
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  Speaker 1: cents a dollar every day. Um, the dollar you know,
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  Speaker 1: had been weak most of this year, had a couple
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  Speaker 1: of weeks of strength with some hawkish Fed talk as
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  Speaker 1: wee can some this week or really since the Friday
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  Speaker 1: payroll reports. So if that, if anything, leads to a
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  Speaker 1: little more inflation. So if inflation starts to pick up,
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  Speaker 1: where's really the value in bond yields? What I think
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  Speaker 1: policymakers are going to ultimately do, And it's obviously very
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  Speaker 1: country to end it. In the US, certainly something probably
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  Speaker 1: after the election is fiscal stimulus. I think we've monetary policy.
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  Speaker 1: If not being fully tapped out is close to tapped out,
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  Speaker 1: there's probably fiscal room. And given the yields are so low,
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  Speaker 1: you know, that's a signal that the country should be
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  Speaker 1: at a minimum turning out their debt tolock in these
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  Speaker 1: low rates. So or if not actually doing more and
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  Speaker 1: more fiscal stimulus our thanks to Eric Stein. He is
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  Speaker 1: co director of Global Income and a portfolio manager for
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  Speaker 1: Eaton Vans joining us from Boston. He was just went
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