Tags: Buffett | fixed | income | investment

Buffett: No Such Thing as 'Good Long-Term Fixed Income Investment'

By    |   Tuesday, 06 May 2014 11:27 AM EDT

Legendary investor Warren Buffett, CEO of Berkshire Hathaway, apparently isn't a big believer in bonds.

"I don't think there is a good long-term fixed income investment," he told Reuters Insider.

"If you had to buy anything, I suppose you'd buy TIPS [Treasury-Inflation Protected Securities], but the yield there is terrible. I would stay away from long-term fixed-dollar investments."

Assuming Buffett just meant there is no good long-term bond investment available now, which appears to be his point, that statement makes a lot of sense.

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Bonds just rallied for 31 years. The 10-year Treasury yield peaked at about 15.8 percent in September 1981 and bottomed at a record low of 1.43 percent in July 2012.

After a run like that, it is difficult to imagine that bond prices will rise further and easy to imagine that they will fall for many years, especially if the economy strengthens.

But if Buffett meant there is never a good long-term fixed income investment, he's on shaky ground. In 1981, the 30-year Treasury yield peaked at 15.2 percent.

So if you bought the 30-year bond then and held until maturity, you would have received a 15.2 percent annual return for 30 years. Stock fund managers would kill for such performance. Even Buffett would likely be impressed.

To be sure, one could argue that bond funds generally represent a questionable investment. If you own Treasurys, you don't have to worry about price declines in the bond market. You can just hold the bonds until maturity and get back 100 percent of the bonds' par value — unless the Treasury defaults on its debt.

But if you buy a bond fund at a time when bond prices are high, and then they fall, they may never rebound enough so that you will get back all of your original investment.

Meanwhile, The Wall Street Journal cites some surprising ways in which bond investments can hurt you:
  • "Shorter maturities used to be safer, but aren't anymore." That's because anticipation of interest-rate hikes by the Fed — not to mention the rate increases themselves — will almost certainly hit the short end of the yield curve harder than it will the long end.
  • "Some bonds grow even more sensitive to rising rates at exactly the wrong time." That's the case with long-term municipal bonds, whose rate sensitivity can rise in tandem with interest rates themselves, for example.
  • "High-yield bonds no longer provide as much protection against rising rates." That's because junk bond yields have dropped to a range of 4 to 5 percent from a range of 7 to 9 percent in previous years.
  • "Floating-rate [bank loan] funds protect against rate volatility, but may pose other concerns." The biggest danger is credit risk, as the funds contain loans made to low-rated companies.
"Leveraged closed-end bond funds could give you a bumpy ride." When rates rise, the prices of these funds can fall further than non-leveraged funds do. And payouts can drop at the same time.

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Legendary investor Warren Buffett, CEO of Berkshire Hathaway, apparently isn't a big believer in bonds.
Buffett, fixed, income, investment
Tuesday, 06 May 2014 11:27 AM
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