Warren Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc. (BRK\A), said he pities investors in bonds, even as he defended U.S. stimulus efforts that have sent yields to record lows.
“I feel sorry for people that have clung to fixed-dollar investments,” Buffett said at Berkshire’s annual meeting in Omaha, Nebraska, where the company is based. Individuals trying to live off bond payments are “victims” of U.S. policies to lower borrowing costs, he said.
Yields on debt from corporate securities to Treasuries (USGG10YR) have tumbled as the Federal Reserve slashed interest rates and bought bonds to help the economy recover from recession. The payout rate on dollar-denominated corporate debt fell to a record 3.35 percent on May 2, according to Bank of America Merrill Lynch Index data. It was 5.66 percent a decade earlier.
SPECIAL REPORT: Berkshire Hathaway Annual Meeting 2013
“The problem faced by people who have stayed in cash or cash equivalents or short-term Treasuries, it is brutal,” Buffett, 82, said at yesterday’s gathering. “I don’t know what I would do if I were in that position.”
Investors have flocked to bonds since the 2008 financial crisis, when the Standard & Poor’s 500 Index of stocks fell about 38 percent in a year. Taxable bond funds had $69.1 billion of net inflows in the first quarter of this year, leading all asset classes, according to Morningstar Inc. (MORN)
The Fed has held its target interest rate for overnight loans among banks between zero and 0.25 percent since December 2008 and is buying $85 billion of bonds a month. Buffett defended the policies set by Fed Chairman Ben S. Bernanke.
“I have a lot of faith in Bernanke,” Buffett said at the meeting. “If he’s running a risk, he’s running a risk he knows and understands.”
Buffett built Berkshire into a $268 billion company over more than four decades by buying businesses such as a railroad and insurers and making stock picks like soft drink-maker Coca- Cola Co. and lender Wells Fargo & Co.
The billionaire has bet on bonds when he considered terms favorable. In 2009, he agreed to buy $300 million in debt issued by motorcycle-maker Harley-Davidson Inc. (HOG) that paid 15 percent.
“We did not think Harley-Davidson was going bankrupt,” Buffett said at the meeting in response to a question about his portfolio. “Any company that gets customers to tattoo ads on their chests can’t be all that bad.”
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