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DEK: Bob Auwaerter, Vanguard head of Fixed Income, on how government regulations and the Volcker Rule will impact the bond market in 2012.
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About Washington.
Here it is.
My next guest says regulations on debt could throw a wrench into what -- been one of the most stable parts of the market.
And may be send borrowing costs soaring for American companies.
Bob -- water is Vanguard's head of -- Overseeing more than 600 billion dollars and assets he joins me now from valley Ford Pennsylvania.
Bob I'm talking about the Volcker Rule I don't want -- -- get deep in the waves but this is critically important what's gonna happen in the coming months.
It certainly it certainly is -- the bond market operates a little bit different than the equity markets.
When.
One of my -- foreign managers goes to sell a bond or may not be a natural buyer or for that specific security on the other size that would dealer.
Past the holding in his or her inventory.
The problem is the Volcker Rule essentially.
Does not Lal that with very few a exceptions.
Citic could really mess up the of the bond market in terms of trading liquidity.
Bob what is have gonna be happening in the coming weeks in terms of the rule making in terms of the public comment period and what do you know based on just your interactions with lawmakers and that there were the people involved in the rule making.
Well initially January 13 -- -- -- -- the the comment period and then there's actually five agencies.
They're riding rule.
They're gonna get together look at the comments -- -- a final rule they have now the laid out for thirty days because they have gotten an avalanche of letters.
From -- buy side investors.
Like us.
From congressman there was a group of about a 120 congressman has signed a letter really -- a lot of concerns.
About the potential -- Volcker Rule.
So I I think there -- beautify I'll be -- beginning to realize.
How much of a problem that this rule could create and that's clearly from our perspective in -- shareholders' perspective that is definitely a good thing.
How much of a problem could -- create in terms.
Making borrowing more difficult or more costly for companies and then that the trickle down effects on each individual in this country.
Well in terms of it definitely will do to reduce.
Liquidity -- make -- harder if we you have to go and buy or sell bond.
The -- that's going to go up.
And eventual away all markets work is that that course task would be.
Attitude the cost of the bonds that a corporation is issuing so net net borrowing cost.
If you're a shareholder and -- mutual fund her in a pension fund and if there is changed in the holdings.
Of that institutions.
Portfolio.
But course to make an exchange you're gonna go up so that's gonna reduce your returns over time.
But I wanna focus on the cost of borrowing for the federal government and -- extremely low rates that you've seen.
On longer term treasuries and -- that dovetail that with what's been going on in Europe.
Do you think that Europe's problems will continue well into the new year to the point that our treasuries are still all.
Very very attractive investments despite these low yields.
You're Europe is far from out of the woods at this point they've they've done some positive things such says is reduce the cost of landing.
The European banks.
And that and it has helped to lower the cost of the debt for example Italy issued debt.
This morning the three year part of the at about two and a half percentage points lower than they did about a month ago.
But that said there were far from out of the woods yet and I think they're still gonna continue to be a flight to quality bid to treasuries.
Which is going to keep yields.
Probably lowered in what they should be.
Given all the issues that we have in this country with regard to our government budget deficit.
You you can see it the entire fixed income market like nobody else I've ever met or we'll probably ever will meet Bob.
What do you like right now about what looks the most attractive in terms of valuation.
Or what you're getting paid to take on.
Risk whether it's credit risk -- interest rate risk.
Sure.
High yield for part of your for portfolio on the one that -- high yield Paper -- to -- attractive did its returns lag that.
Of our regular corporate bonds investment great corporate bonds during most of 2000 -- -- eleven.
Munis at least relative to treasuries continue to look chief going as we all know there was out one prognosticate.
-- At the end of that 2010.
Who is going for these massive the false and it's exactly the opposite occurred -- state local governments.
Unlike the federal government are making the right kind of cuts so we thank you know the relatively attractive.
But at the end of the day yields are low compared to historical norms and -- some we're gonna have to live -- for a while unfortunate.
-- it was great to talk to an -- will say it was Meredith Whitney and she was dead wrong it was a great totally absent that kind of -- hasn't there.
Candidate but Bob.
We heard it reviewed thank you so much it was great to see happy new year McMahon Bob -- order -- -- to send you that of us.
Now here.
