Federal government are far from done in terms of stimulus: Bond Portfolio Manager

Janus Henderson Investors Co-Head of Global Bonds Nick Maroustos joins Yahoo Finance’s On The Move to address how COVID-19 is impacting U.S. markets.

Video Transcript

- Nick Maroustos is the Janus Henderson Investors co-head of global bonds. And we appreciate your being here because we have to address an issue. We're seeing this play out when Chair Powell talks about all of the liquidity they've provided, it's up to Congress to do some fiscal stimulating. But I think a lot of us are curious and fearful of deflation. And I wanted to ask you, despite what the Fed has done, how do we avoid asset deflation when we're seeing potential migration from cities, we're seeing people miss their rent payments? We're going to see the value of real estate-- it's got to fall, doesn't it?

NICK MAROUSTOS: You know, look, I think you're absolutely right. I think, if this crisis continues longer than expected, the risk of debt deflation cycle grows dramatically, just given the prevailing high levels of debt that we're sitting on. And I think that would trigger an even more dramatic government intervention, including even greater Federal Reserve involvement in the credit markets, and even, potentially, I hate to say it, the stock market.

So you know, look, I think that the Fed and the government are far from done in terms of the amount of stimulus that's going to be implemented. Upsizing is a given. They're not done. And I would continue to see more stimulus plans coming down the chute to support not only the global debt markets, but also the equity markets.

- Well, we know that the Fed stands ready to backstop no matter what, but what kind of impact would that really have? I mean, they don't want negative interest rates, but wouldn't they almost be forced into it?

NICK MAROUSTOS: Well, look, I think that the market could always force them into negative interest rates. And we've been on the fence in the US in terms of them adopting negative interest rates. We don't expect other central banks to adopt negative interest rates, at least funds that haven't yet. And I think recent experience suggests that the stimulus benefits would be small at best, right?

There-- the argument for cutting interest rates below zero is typically the same as the argument for cutting rates that are above zero. I mean, lowering the interest rates eases financial conditions, it boosts demand, it reduces debt burdens, it helps the economy. But all that data has yet to come to fruition. We've seen Japan being faced with negative interest rates for over a decade. We've seen Europe faced with negative interest rates. We've yet to see that help the economy or return to a full employment story.

So I think what the Fed will concentrate more so on is supporting the credit markets and using that as a tool to support the economy, because they have a ton of ammunition that stands behind them. They can tighten investment-grade spreads significantly. They have the ability to buy about 2 billion a day in the secondary market, through the secondary market, corporate credit facility, before it even reached its full size of 250 billion. So that would take them to the end of December-- end of September.

They also have the primary market corporate credit facility to play with. And if you combine both of those, that gives them about 6 billion a day before they reach their full size in September. And I think it's unlikely that they're going to have to use that. But we would argue that the investment-grade credit market, particularly assets five years and in, is kind of the quasi treasury.

And you're sort of seeing that with the Fed reduce the amount that they're buying in the treasury market. Even today, they slowed their purchases down from 6 billion to 5 billion. So much more concentration on the credit markets than the treasury markets.

- So Nick, put all that together for us. It's Julie here. Hi. Put all that together for us, and tell us how you're thinking about risk right now. What is the biggest risk? I know, in your notes to us, you talk about a risk of a debt deflation cycle, that there-- that risk is growing. Is that what you're most concerned about, or what are you most concerned about?

NICK MAROUSTOS: Look, there's-- I mean, at this point, there's a number of things that really worry us. You have a debt deflation cycle. You know, the people that are shouting from the rooftops talking about this being inflationary I think is somewhat delusional, in the sense that there's no proven link between central bank quantitative easing and inflation.

Since the global financial crisis, we've seen huge increases in the central bank balance sheets, and they've coincided with intensifying deflationary pressures, rather than rising inflation. So all this means is that there-- that central banks are going to remain hyperaccommodative over the next 12 to 24 months.

I think what really frightens us is this disconnect between what's happening in the economy and what's happening in, let's say, the stock market, or even the debt markets, because policymakers have made the right moves that market function seems to be solved, but the long-term consequences are likely to be discounted too much by the market because this pandemic is going to scare consumers for some time. It's going to alter consumer behaviors.

The concept of a V-shaped recovery is out the window. You know, our argument has always been that the right side of that V is going to be significantly less steep than what people expect because the time to get back into the economy is going to be very slow. We're seeing some positive signs as they've reopened. We're hoping that's not going to bring on a surge of new cases.

So that optimism, we're sort of trading on some hope, and we've yet to see that play out in the numbers. We've seen marginal increases in consumption in states like Colorado and Georgia and Texas, but we're far from getting back to normal. And that's yet to really take place in the credit markets or even the equity markets.

- So Nick, when do the markets, especially the equity market, when does it wake up to the fact-- we saw the reports out of Georgia that, even though there might be pickup in consumer demand, there hasn't been a recreation of jobs. It's not following.

NICK MAROUSTOS: No, and that's the thing. I think everybody is sort of saying, well, we're not going to fight the Fed. And the equity markets, I mean, that's one of the big rules when trading equity markets, is you don't really fight what the Fed is doing. The Fed is looking to support the market. So you know, the feeling from our side is that this disconnect can last for an extended period of time between what's happening in the economy and what's happening with the markets.

And look, the optimist side of us likes to think that hopefully we can get a handle on this virus, hopefully we can start opening up. Keep that optimism going, keep the number of cases down, and then you will see a surge in consumer spending. You will see a surge in growth. And ultimately, that could lead to markets even trading higher. So you know, we were trading significantly lower a month ago. We've seen a significant snapback in risk assets, both in credit, high-yield and equities. You know, the hope is that the Fed can sort of keep us buoyed a little bit longer as we sort of navigate out of this.