Jason Stipp: Data that we've seen at Morningstar shows a lot of money flowing into bond funds and fixed income. As a manager that looks across asset classes, what do you make of the investors piling into fixed income and do you think that the expectations that they have for this asset class might not be aligned with the prospects?
Steven Romick: Whenever portions flow into high yield, it's a rear view mirror, and people are in trouble if they're making that bet because, as I stated earlier at the beginning of this conversation, there isn't a lot of juice in high yield today.
If they're going into [it] as a place of safety, to de-risk their portfolio? Then it becomes... maybe there's an argument to be made for that, especially given how the market's risen 75-80%. But then I must ask that question for those high-grade portfolios, how much of those high-grade portfolios are longer duration?
So we are concerned with the amount of money the government is borrowing. At some point the rates are going to go up. 48% of the U.S. Treasury debt, of the public portion, comes due over the next two years. That's over three and a half trillion dollars. Add to that three trillion dollars the deficit over two years, plus. You're talking six and a half, seven trillion dollars of Treasuries you're going to have to sell.
So at some point the people who are lending to us, our lenders, are going to say, you know what? Enough's enough. We're worried about inflation, devaluation. We're worried about lending you money at that low level of interest rates, which explains in part why the yield curve has begun to steepen. See, the yield curve is much steeper now than it was a year ago.
So we think that that question is out there, and when it gets answered is anybody's guess. So we don't know if it gets answered this year, if the rates go up. I doubt it. I think next year, the earliest we're looking at is 2011. But rates are going to be higher in the future with or without higher inflation.
Stipp: Steve, thanks so much for your insights and for joining us today.
Romick: My pleasure.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.