Why Investors Are Seeking the Safety of Treasuries

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Aug. 26 (Bloomberg) -- TIG Securitized Asset Fund's Jeff Lewis and Citigroup's Tobias Levkovich discuss the state of the U.S. bond and stock markets with Matt Miller and Julie Hyman on "Street Smart." (Source: Bloomberg)

Quietly tonight at home with my own little beer.

What do you think about what the bond market is telling us?

Kind of going the other year -- way.

People are obviously running for the safety of government debt while the equities market keeps marching higher.

Why is that?

Well, you have a number of interesting things going on in the bond market.

You have incredibly low volatility.

And they are doing that now.

We see both marketplaces with remarkably low levels, which has a tendency to lift prices so you see it in both markets.

You see it in the bond market.

But i think if you look at the risk-reward that is facing investors, you look at retail investors and their participation in the bond market, it is not so much in treasuries.

They are taking little steps into credit products.

Investment grade.

You have to find yield somewhere.

You look at the high yield indexes.

They are not fairly compelling when you look at them for the long term in terms of where those numbers have then, and so i am a little concerned with the retail guy, when the rates go up, that puts some pressure on the credit sectors, that it may be the retail guy running for the hills.

We actually saw that with mutual funds, the high yields.

And this created widening credit spreads.

So i am not sure about that.

I would argue that what is going on on the treasury market is a competition with yield globally.

It is not really telling you much about the domestic economic prospects.

It is nice to have yellen and company tell you, we are not going to rush to raise rates.

Do i buy a one percent?

Do i buy a spanish yields?

I think most people say they are very pro-yankee at that point.

Yes, i do not know why you would trust the spanish market anymore.

And coming across the bloomberg terminal, saying the meeting between vladimir putin and the ukrainian president has ended, but we know now that it lasted for a couple of hours.

The important thing is not to tell viewers that this has ended, a to point out that there are so many hotspots as far as geopolitical issues.

Ukraine is only the tip, obviously.

We have got what is going on in syria.

We have what is going on in iraq.

And don't forget, we have what is going on in israel.

By the way, the islamic state militant group is also doing its best to take over at airports things there, as well.

Should you be concerned, or should you shrug this off, as the market has been doing?

Geopolitics is always a risk.

But the thing is everything seems to be very contained at this point, and i guess of it blows out into a regional process, you were to see tanks really crossing the border into ukraine from russia, that would start a whole new situation.

You have some that are going on in russia, but is that still marginal?

There are some that have very large exposures to russia, and others have less exposure.

The u.k. is doing just fine.

So europe has other issues in terms of structural issues they really have not addressed.

When you look at that yields bread between the u.s. and those countries, structurally, they are so behind the eight ball, and we are actually looking to grow, and that will have an impact on our rates.

They are not growing nearly as well as we are, and they will not, because they still have not dealt with the structural problem.

Even as the biggest companies in america are doing this?

The new tax in version merger every day?

Or you don't think that is such a big deal?

As we were discussing during the break, when you quantify it, it is not that big of an issue for the u.s., but as we were discussing, if we have the highest corporate tax rates in the world, and we are driving our companies out, maybe we should be looking at the structure of our system.

A lot of people have suggested as an alternative that we do away with corporate taxes, as well as do away with capital gains, so we have one rate for income, and you do not tax it at that level.

It is roughly revenue neutral or revenue positive.

Doing things that are not necessarily productive.

I would take it a step further and give the income tax, as well.

I am serious, because why penalize someone for success while they are producing for the society?

Why not just tax people on consumption and then a huge death tax that is unavoidable to kind of level the playing field and stop the buildup of stagnant wealth?

Matt miller for congress.

Just keep in mind, one factor with regard to this, the effect of the tax rate is about 27% today -- effective tax rate is about 27%. essentially, there is this idea, the statutory rate is really disruptive.

Companies have figured out ways.

But would it not be nice to bring the statutory rate down?

Of course, and that is the big five.

No, i'm going to remove this loophole and that loophole, and do not take it away from me.

Take it away from him or her.

That is part of the difficulty.

Of course, the congressmen and senators want to give this out because that is their gravy train.

That is how they get return favors.

You either get it in tax rates or tax expenditures.

There is lots of work done in academics about a democracy doomed to fail because politicians keep promising things and essentially wiped out the treasury.

You are going to bring us back to investing, weren't you?

I was trying.

I was trying.

If you are looking at growth relative to the rest of the world in the u.s., what kind of opportunities are you looking for in the u.s.? are you looking at some more cyclical stocks right now?

For me, small caps and large caps, spending related.

But it has to be a little more targeted, and you want to look at taking advantage of cheap natural gas, and a lot of the stuff has to get processed, so that is a place i would like to look at more cyclical.

Some of these you do not want to own, but when you really do not want to own is biotech.

It really does do well.

The present value of the future stream as you raise rates, they discount them, and the compounding works against you.

It would certainly be some of the mortgage reits that make their money by leveraging the yield curve and leveraging interest rates.

Some of the most well known, with about $80 billion in assets, enormous organization, but they sensually don't take a lot of credit risk.

Many are government guaranteed, so where they are making their money to, with the dividend yield is by using leverage and taking the yield curve.

They have longer assets, shorter liabilities.

And we saw some stocks get hit hard, and they have gone back up to where they were before the tantrum, and come again, this environment we have had a very low volatility in the stock and bond markets has been nirvana for them, and the next time we see this, it will not be good for them.

What about homebuilders?

People know that rising rates are coming?

Homebuilders tend to be very anticipatory, about 1.5, two years in front of the cycle, and they really have been dead money from 2013 on.

There is a little volatility, but there is not much going on.

Probably in the beginning of 2013, 16% national increase in housing prices, and you have relatively low inventories, so what you have had is a great environment.

They are able to move the product that they are creating.

Their earnings are good, but everybody is looking ahead, saying what is next as rates rise.

Really trying to take advantage of some of the pullback.

I think it is more of a trading

This text has been automatically generated. It may not be 100% accurate.


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