WEBVTT - Eaton Vance's Stein: Flatness of Yield Curve Not Healthy(Audio) 0:00:03.160 --> 0:00:06.519 Global business news twenty four hours a day at Bloomberg 0:00:06.600 --> 0:00:09.680 dot com, the radio, plus mobile, and on your radio. 0:00:09.960 --> 0:00:14.360 This is a Bloomberg Business Flash from Bloomberg World Headquarters. 0:00:14.480 --> 0:00:18.040 I'm Charlie Pellett's stocks edging toward a record, advances in 0:00:18.160 --> 0:00:22.040 government bonds pushing some yields to record lows, Emerging market 0:00:22.040 --> 0:00:24.800 assets extending a rally. Right now. We have got the 0:00:24.880 --> 0:00:28.639 SMP five hundred indecks up six points to eighteen. That 0:00:28.800 --> 0:00:31.400 is a gain of three tenths of one percent. Nat 0:00:31.520 --> 0:00:34.440 stack also advancing three tents of one percent, up twelve 0:00:34.479 --> 0:00:37.720 points down. Industrials up forty nine, also a gain of 0:00:37.960 --> 0:00:41.559 three tenths of one percent. The tenure of four thirty seconds. 0:00:41.600 --> 0:00:45.000 That yield is one point seven oh percent. Gold up 0:00:45.040 --> 0:00:47.920 sixteen dollars he ounds to twelve sixty three, a gain 0:00:48.000 --> 0:00:51.000 of one point three percent, and crude oil trading above 0:00:51.080 --> 0:00:54.520 fifty one dollars of barrel West Texas Intermediate fifty one 0:00:54.560 --> 0:00:57.040 eleven right now of seventy five cents. That is a 0:00:57.080 --> 0:01:00.280 gain of one and a half percent. I'm Charlie. Look, 0:01:00.360 --> 0:01:05.400 that's a bloom Bird business flash. He's taking stock The 0:01:05.400 --> 0:01:12.120 FED in focus on Bloombird Radio stimulative central banks around 0:01:12.160 --> 0:01:15.600 the globe. This has put a nice solid floor under 0:01:15.600 --> 0:01:17.920 the U S stock market is certainly helping to drive 0:01:17.959 --> 0:01:21.000 not only the US bond market up in price down 0:01:21.000 --> 0:01:23.319 in yeld at bond markets around the world. The ECB, 0:01:23.440 --> 0:01:27.000 the European Central Bank starting its purchases of corporate bonds 0:01:27.040 --> 0:01:29.680 today and this is just adding fuel to the fire. 0:01:29.959 --> 0:01:32.400 Joining us now, Eric Stein, he's co director of Global 0:01:32.440 --> 0:01:36.400 Income and portfolio manager at Eton Vance. He joins us 0:01:36.640 --> 0:01:39.480 from Boston as we put the Fed and central banks 0:01:39.520 --> 0:01:42.440 in focus here. Welcome to the show. Thanks for having me. 0:01:42.880 --> 0:01:46.039 So um, I guess it's just another one of the 0:01:46.040 --> 0:01:49.320 bazooka type weapons that Mario Dragging has promised. This The 0:01:49.400 --> 0:01:52.720 question is how effective it will be in stimulating economy. Yes, 0:01:52.800 --> 0:01:55.040 you know, I think what we're seeing today with the 0:01:55.080 --> 0:01:57.720 first day of corporate bond purchases. This is announced, you know, 0:01:57.800 --> 0:01:59.840 back in March, and it takes a little while for 0:01:59.880 --> 0:02:02.040 the central friendI central bank in this case, the ECB 0:02:02.160 --> 0:02:04.680 to kind of get their operational house and order and 0:02:04.760 --> 0:02:07.280 now they're buying corporate You know, we have seen pretty 0:02:07.280 --> 0:02:10.720 big rallies and corporate bond spreads both high yield and 0:02:10.760 --> 0:02:13.040 investment grade in Europe since the announcement of the so 0:02:13.160 --> 0:02:15.440 called announcement effects so it's not just on the day 0:02:15.440 --> 0:02:19.760 of purchases, it's also when the announcement happens. Eric, is 0:02:19.800 --> 0:02:25.720 there any evidence that this strategy works? So, you know, 0:02:25.760 --> 0:02:27.720 I think to me, it's always you know, look at 0:02:27.720 --> 0:02:30.160 the counter factual. If you weren't doing this with the 0:02:30.160 --> 0:02:33.720 European economy be in a better situation, I'd argue not. 0:02:33.880 --> 0:02:36.720 You know, certainly, you know, there's debates about the effectiveness 0:02:36.840 --> 0:02:39.040 of you know, que when we when the FED was 0:02:39.080 --> 0:02:41.600 doing it here in the US, and with Europe where 0:02:41.639 --> 0:02:44.320 most of their you know, financing is bank let not 0:02:44.400 --> 0:02:46.720 capital markets lad like we have in the US, it's 0:02:46.720 --> 0:02:50.160 probably gonna be even harder, um for for the QI 0:02:50.240 --> 0:02:52.640 to actually feed through the real economy. That being said, 0:02:52.680 --> 0:02:55.120 they need to try, given that the European Central Bank 0:02:55.400 --> 0:02:58.120 there's nowhere close to the two percent inflation there are 0:02:58.400 --> 0:03:00.239 you know, maybe a little bit overblown, but I think 0:03:00.240 --> 0:03:02.680 at least a couple of months ago some legitimate deflation 0:03:02.720 --> 0:03:06.200 fears in Europe. Unemployment is still significantly significantly higher than 0:03:06.200 --> 0:03:08.240 the US. They have to do something and so this 0:03:08.280 --> 0:03:10.560 is really a way that Dragging and his colleagues at 0:03:10.560 --> 0:03:12.560 the ECB can do the best they can to to 0:03:12.639 --> 0:03:16.720 jump start the credit markets. Is the financial plumbing clogged 0:03:16.880 --> 0:03:20.960 up within the banks? Though? Do the do Europe's banks 0:03:21.040 --> 0:03:23.320 need to do some cleaning up of their balance sheets 0:03:23.320 --> 0:03:27.040 before they're healthy enough to actually start lending more and 0:03:27.200 --> 0:03:30.960 fire up the capital markets. I think it would certainly help. 0:03:31.000 --> 0:03:32.680 I mean, I think if you look at you know, 0:03:32.720 --> 0:03:34.720 what did US banks do in two thousand and eight 0:03:34.720 --> 0:03:36.760 and two thousand nine. We have the stress tests. They 0:03:36.760 --> 0:03:39.960 were much maligned at the time, but they ultimately worked. 0:03:40.000 --> 0:03:43.200 The US banks raised capital, help cleanse the system and 0:03:43.560 --> 0:03:46.600 really got things going. And as as as I said before, 0:03:46.760 --> 0:03:48.880 US is more capital markets left well in Europe, where 0:03:48.880 --> 0:03:51.279 the banks are even more important. It's about two thirds 0:03:51.480 --> 0:03:54.480 of credit is bank led versus capital markets led. In Europe, 0:03:54.480 --> 0:03:57.600 it's the opposite in the US. They haven't done that. Yes, 0:03:57.640 --> 0:03:59.720 there have been some stress tests, Yes there's been some 0:04:00.000 --> 0:04:03.040 opital raising um, but by and large, the European banks 0:04:03.040 --> 0:04:05.240 to me are in you know, nowhere near is going 0:04:05.320 --> 0:04:07.480 to shape as US banks. So I think that's part 0:04:07.480 --> 0:04:10.840 of the problem. Longer term, certainly lots of regulators in 0:04:10.880 --> 0:04:13.880 Europe one and more capital markets led credit system. It's 0:04:13.880 --> 0:04:16.039 going to take some time to get there. Um, but 0:04:16.080 --> 0:04:17.919 I certainly think you know the point of your question, 0:04:17.960 --> 0:04:21.120 the problem with European banks is somewhat leading to some 0:04:21.200 --> 0:04:24.920 issues in terms of credit intermediation. Eric, do you believe 0:04:24.960 --> 0:04:29.760 that higher rates would encourage people in institutions to lend money? 0:04:29.760 --> 0:04:33.599 Why lend money to anyone or anything if you're going 0:04:33.640 --> 0:04:36.800 to get nothing in return? So, I look, I think 0:04:36.839 --> 0:04:39.040 that's a very good question. I think you know, in 0:04:39.120 --> 0:04:41.320 terms of I think it's still an open question when 0:04:41.400 --> 0:04:44.400 when yields are as low as they are in negative 0:04:44.440 --> 0:04:46.800 in in many countries in Europe and many parts of 0:04:46.800 --> 0:04:49.320 the yield curve, I think a lot of the traditional 0:04:49.360 --> 0:04:51.839 relationships that we think about in economics and with interest 0:04:51.920 --> 0:04:53.680 rates and the lower rates are going to spur more 0:04:53.720 --> 0:04:56.560 borrowing and more lending, uh, you know, may not be true. 0:04:56.600 --> 0:04:59.320 I also think the flatness of the curves that we 0:04:59.360 --> 0:05:02.400 see global is problematic. It's not good for banks. Help 0:05:02.480 --> 0:05:04.160 to you, if you have a flatter curve, it's not 0:05:04.160 --> 0:05:07.520 good for bank profitability. Means that the credit channel is 0:05:07.560 --> 0:05:10.400 more stuck in European banks. I think it also sends 0:05:10.440 --> 0:05:13.520 a lack of confidence signal um to have a flatter curve. 0:05:13.560 --> 0:05:15.560 So I actually think central banks would be better off 0:05:15.600 --> 0:05:19.080 having deeper curves the rate um. The rates that we 0:05:19.160 --> 0:05:21.760 have are low enough. It's other things trying to get 0:05:21.760 --> 0:05:25.960 the so called animal spirits out there, which is what 0:05:25.960 --> 0:05:28.719 what is more needed than ever lower interest rates. And 0:05:28.720 --> 0:05:31.400 of course I would argue that if you start raising rates, 0:05:31.640 --> 0:05:35.520 the key rates, the FED funds, overnight type rates, you 0:05:35.560 --> 0:05:38.919 would ultimately make spur the rally in the long and 0:05:39.120 --> 0:05:42.200 more if people think that the Fed's tightening prematurely and 0:05:42.240 --> 0:05:45.240 that's going to slow down the economy. But to that point, 0:05:45.720 --> 0:05:48.160 this this rally seems to be heating up again. Is 0:05:48.200 --> 0:05:50.800 it's going to continue down to one point seven zero? 0:05:50.920 --> 0:05:52.600 It was trading just a little bit about one point 0:05:52.600 --> 0:05:56.040 six nine on the benchmark US tenure note? Can that 0:05:56.279 --> 0:05:58.320 head down to one point six? Can I head down 0:05:58.320 --> 0:06:00.840 to one point five? Or is is it like it? 0:06:00.960 --> 0:06:03.279 Certainly could, you know, in a in a world of 0:06:03.360 --> 0:06:05.680 negative central bank yields and a lot of fear, it 0:06:05.760 --> 0:06:08.240 certainly could. But keep in mind, you know, yields of 0:06:08.320 --> 0:06:10.120 anything where we're kind of flat to going up a 0:06:10.120 --> 0:06:12.040 little bit, and then we had the you know, far 0:06:12.120 --> 0:06:15.400 weaker and expected payroll report on Friday. Some of the 0:06:15.480 --> 0:06:17.359 data turns that could turn yields a little bit. I 0:06:17.400 --> 0:06:19.760 also think the whole Brexit issue out there is a 0:06:19.800 --> 0:06:22.120 lot of uncertainty weighing on the markets where a lot 0:06:22.120 --> 0:06:25.039 of money is in very safe assets, and so you know, 0:06:25.160 --> 0:06:27.599 right now the trend seems to be flat or lower 0:06:27.640 --> 0:06:29.440 on these bond yields. I don't think it really takes 0:06:29.440 --> 0:06:32.320 sense from a longer term perspective, especially given that you know, 0:06:32.360 --> 0:06:34.320 inflation in the US, as much as no one wants 0:06:34.320 --> 0:06:36.200 to talk about at wage, inflation is picking up a 0:06:36.200 --> 0:06:39.000 little bit. Oil seems to go up in our fifty 0:06:39.080 --> 0:06:42.440 cents a dollar every day. Um, the dollar you know, 0:06:42.520 --> 0:06:44.440 had been weak most of this year, had a couple 0:06:44.480 --> 0:06:46.480 of weeks of strength with some hawkish Fed talk as 0:06:46.520 --> 0:06:48.800 wee can some this week or really since the Friday 0:06:48.800 --> 0:06:51.359 payroll reports. So if that, if anything, leads to a 0:06:51.360 --> 0:06:53.720 little more inflation. So if inflation starts to pick up, 0:06:53.760 --> 0:06:56.760 where's really the value in bond yields? What I think 0:06:56.760 --> 0:06:59.440 policymakers are going to ultimately do, And it's obviously very 0:06:59.480 --> 0:07:02.560 country to end it. In the US, certainly something probably 0:07:02.600 --> 0:07:06.320 after the election is fiscal stimulus. I think we've monetary policy. 0:07:06.480 --> 0:07:09.000 If not being fully tapped out is close to tapped out, 0:07:09.040 --> 0:07:12.440 there's probably fiscal room. And given the yields are so low, 0:07:12.800 --> 0:07:14.880 you know, that's a signal that the country should be 0:07:15.080 --> 0:07:17.520 at a minimum turning out their debt tolock in these 0:07:17.520 --> 0:07:19.920 low rates. So or if not actually doing more and 0:07:19.960 --> 0:07:23.280 more fiscal stimulus our thanks to Eric Stein. He is 0:07:23.360 --> 0:07:26.520 co director of Global Income and a portfolio manager for 0:07:26.560 --> 0:07:30.000 Eaton Vans joining us from Boston. He was just went 0:07:30.080 --> 0:07:32.280 speaking about oil. Oil is up about one and a 0:07:32.320 --> 0:07:34.920 half percent, fifty one dollars and nine cents for a 0:07:34.960 --> 0:07:37.800 bart of West Texas And to media crew, We're broadcasting 0:07:37.840 --> 0:07:40.840 live from Pershing's Inside six conference at the High End 0:07:40.840 --> 0:07:46.960 Regency in Orlando, Florida. This is Bloomberg Radio. The unemployment 0:07:47.040 --> 0:07:50.600 rates a four four point nine five percent lately, So 0:07:50.640 --> 0:07:53.440 why is Janet Young still worried about the labor market? 0:07:54.040 --> 0:07:55.760 As we put the federal Reserve in focus, we're going 0:07:55.800 --> 0:07:57.800 to learn more about the brutal journey back to work 0:07:57.840 --> 0:07:59.120 for millions of Americans.