Jeremy Glaser: Let's take a look at some of those risks that you mentioned, particularly from abroad. You mentioned the eurozone as being a potential risk. Is the eurozone completely doomed? Do they have a way out of this mess, and what impact could that have on U.S.-based bond investors?
Steve Walsh: The eurozone issue which has been with us since, I guess, it was the spring of 2010 when Greece first started to have their problems, and the markets became aware of sort of fiscal problems that existed across the periphery and what that might mean for the whole eurozone. So it's been with us for a good three or more years, and it's likely, Jeremy, to be with us for a while. We've been in the sort of muddle-along camp that this is going to be an issue that markets are going to have to continue to focus on. It's a tough thing to do for the eurozone policymakers to cobble together everything necessary to guarantee to investors that the eurozone is watertight and going to exist forever.
So, is it doomed? No. I don't think it's absolutely doomed to failure. Do they have a lot of challenges in front of them and a lot of tough sledding that they're going to have to get through? Absolutely. The one big change over the course of the last year say versus the prior three years with regard to the eurozone is the European Central Bank has changed its philosophy meaningfully, with the exit of Jean-Claude Trichet and with Mario Draghi coming on the scene. The European Central Bank has looked a lot more like the Fed. That is to say they're willing to use a lot more tools to try to keep financial markets a bit more stable. Obviously, the long-term refinancing operation programs last year were designed to support the banking system, but indirectly designed to support the eurozone. And then last summer, we had the Outright Monetary Transactions program where the European Central Bank said, "Hey, we will do anything necessary to try to keep the eurozone together."
That change in philosophy has brought a lot more stability to financial markets, a lot more. Back in 2010, Jeremy, if you had told me that the Italians are going to have a split election and might not know where they're going to go with regard to the future of the austerity programs and the structural reforms needed and they are really up in the air and that Cyprus--even though Cyprus is a tiny [country]--that they'd be on the brink of leaving the eurozone, you would have had a lot more volatility in markets, but you don't. It's because the ECB has drawn the line in the sand, and said, "Hey, I'll buy these securities if you won't," which has again, it's brought stability.
But as much stability to financial markets as that change in philosophy has brought to the eurozone issue, it has done absolutely nothing to resolve the underlying problems. It's tried to buy time. It's given policymakers time to come up with a banking union, to make progress toward a physical union, to try to maybe ultimately one day have eurozone bonds. But the policymakers, the government officials, the political officials need to make that progress. The ECB can only try to make it a little bit clearer sledding for them. So I think it's an important distinction.
So [the eurozone is] not doomed to failure. They've got a lot of work in front of them and to sort out. But they have a little bit less volatility than they've had to deal with in financial markets because of the ECB activity. So our kind of key this year to watch for the eurozone is ultimately they're going to need to get some growth because this problem becomes a lot more difficult, and people in the streets of Rome or Athens or Portugal get a lot more fatigued by, sort of, austerity that's being thrust upon them when the economy is not doing well. Everybody just says, "OK, I'm tired of this."
The growth recently has actually not looked too good there. It's actually surprised a little bit to the downside. So, it would be difficult to have as much good news on Europe in 2013 as you had in 2012; 2012 had a lot of good news primarily surrounding what the EBC decided to do. But at the end of the day, these guys got to start make some progress, and they haven't made a lot of progress in a while on any of these fronts, the banking union or, again, moves toward a more fiscal union.
The investors are going to need to think about the impact for U.S.-based fixed-income investors, as it's made U.S.-dollar-based assets more attractive. There is no question Treasuries are lower today because of low inflation, like I said, because growth is sluggish, because the Fed is buying them, yep, all those, but it's also because the world wants a liquid risk-free asset. And the U.S. looks better than the eurozone, and rather than just buy Treasuries, some of them buy investment-grade bonds. So it all contributes to the U.S. securities looking relatively more attractive than European securities to global investors.