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Investment icon Warren Buffett announced yesterday that Berkshire Hathaway Inc. have cut the allocation to bonds at the firms insurance units, to the lowest level in more than a decade as the company warns that low yields will hurt results.
Fixed-income assets made up 14% of investments at Berkshire’s insurance unit as of Dec. 31, according to the company’s annual report. This compares to between 20% to 25% since 2002, according to Berkshire documents.
Buffett said low yields mean that insurers and other bond investors are holding “wasting assets.” To counter that, he struck private deals for higher-paying securities and added equities. Omaha, Nebraska-based Berkshire also made acquisitions and invested in its railroad and energy utilities.
As a replacement to bonds, Buffett has been turning to infrastructure investments. Berkshire’s MidAmerican Energy acquired electricity provider NV Energy last year, and he increased expenditure at the BNSF to $3.9 billion. Buffett said he expects the outlay to climb again this year.
“We will spend considerably more in 2014,” Buffett wrote in his letter, referring to the railroad’s capital spending. “Like Noah, who foresaw early on the need for dependable transportation, we know it’s our job to plan ahead.”
I should point out, that while Buffett’s investments always make headlines, his investment goals are very different to yours. Buying railroad and energy stocks is certainly an option, but its not one most advisors would recommend as a substitute for bonds.
The advice for most private investors remains the same, favor shorter-duration bonds. This is also something Berkshire is doing. As of Dec. 31, Berkshire held about $8.5 billion of bonds that were due in a year or less, compared with $6 billion at the end of 2012.
Todays Other Top Stories
Reuters: – Puerto Rico hires restructuring expert as financial adviser. – Puerto Rico’s Government Development Bank has hired a restructuring expert to evaluate potential funding sources and financial proposals for the bank and commonwealth, it said on Wednesday, less than a week before the commonwealth’s expected multi-billion dollar municipal bond offering.
BondBuyer: – Inverted PR curve brings 6-month yield lows. – Long-term Puerto Rico bonds touched the lowest yields in as much as six months Wednesday as the island’s debt curve remains inverted ahead of a $3.5 billion bond issue.
Bloomberg: – Puerto Rico electric downgrade brings price upgrade. – Boilers run day and night for eight months of the year to transform sugar-cane molasses into liquor at Bacardi Corp.’s facility in Puerto Rico.
Jake Zamansky: – Puerto Rico bond ‘alternative’ investors to square off against retail investors. – Puerto Rico is heading toward a $3.5 billion bond offering this month which would be used to help stabilize the island’s finances and pay interest on its $70 billion in current debt. A major question arises as to whether investors in this new debt will be given priority over existing investors who are largely Mom and Pop investors.
Cate Long: – Puerto Rico’s perfect storm. – Two critical documents related to Puerto Rico’s upcoming $3.5 billion general obligation bond offering have been released: A draft of the preliminary official statement (POS) for the general obligation bond underwriting and a special liquidity update from the Government Development Bank (GDB). Both documents contain new financial information and a laundry list of risks for potential bondholders.
abcNews: – Can the calm last in the municipal bond market? – Money is flowing once again into muni-bond mutual funds, a turnaround from last year’s exodus. So far, investors have been rewarded for renewing their interest, but managers caution that several challenges remain.
Reuters: – Individuals flee shrinking U.S. municipal bond market. – Individual investors have been fleeing the U.S. municipal bond market for more than a year, and data released by the Federal Reserve on Thursday shows they now hold the smallest amount of the debt in more than seven years.
LearnBonds: – Bond risk on and bond risk off! – John Mason talks about international flows of funds into and out-of sovereign bond markets around the world. As investors get shaky about the “climate” surrounding the debt of a county or a region, they flock out of that debt and into the debt of another country or region.
Market Realist: – Comparing high yield bonds and investment-grade corporate bonds. – The risk associated with investment-grade corporate bonds is less than high yield bonds. The difference between the rates of return for investment-grade corporate bonds and high yield bonds is known as the “junk-to-investment-grade spread.” This spread, also called “credit spread,” is the premium investors demand in order to hold high yield bonds over lower-yield investment-grade corporate bonds.
WSJ: – Treasury bonds pull back on drop in jobless claims. – Treasury bond prices fell as the latest labor-market release boosted optimism over the economy and sapped demand for the safe-haven market.
WSJ: – Deluge of corporate bond issues continues for second day. – About a dozen high-grade companies are selling roughly $18 billion in debt on Wednesday, extending a spree of bond sales that began with Tuesday with the busiest day of the year for new debt sales in the U.S.
Bloomberg: – Banks enriched by junk resist U.S. regulator standards. – More than five months ago, the Federal Reserve and Office of the Comptroller of the Currency told some of the biggest banks to improve underwriting standards for non-investment-grade loans. The market is showing few signs of tightening as lenders chase lucrative fees.
Bloomberg: – Are High-yields the place to be for bonds? – ING Investment Management Lead Portfolio Manager U.S. Credit Strategies Tim Dowling discusses playing both aspects of the bank “clean up” story. He speaks to Anna Edwards and Mark Barton on Bloomberg Television’s “Countdown.”
Invesco: – High yield bonds in a rising rate environment. – Since 1987, there have been 16 quarters where yields on 5 year Treasuries rose by 70 basis points or more. During 11 of those quarters high yield bonds displayed positive returns; during the five quarters where high yield bond returns were not positive, they rebounded the next quarter.
Artemis: – The logical place for catastrophe risk is the capital market. – The logical place for peak natural catastrophe risks lies in the global capital markets, not the traditional reinsurance market, according to Samir Shah, Chief Reinsurance Officer of insurer AIG.
Professional Planner: – Emerging markets and Europe offer opportunities to fixed-income investors. – Today’s uncertain fixed-income market environment is providing opportunities for investors who are prepared to accept more risk in exchange for higher potential returns, global asset manager AllianceBernstein said today.
Reuters: – IMF unveils investors behind emerging market debt boom. – Big institutional investors account for 80 percent of the half a trillion dollars foreigners have plowed into emerging market sovereign debt in the last few years, according to an analysis by International Monetary Fund economists.
Investing.com: – It’s all about asset reallocation. – One factor that can serve as a tailwind to a positive equity market is investors repositioning their investment portfolios from a too-much-fixed-income allocation into a larger equity allocation.
Financial Post: – Bonds in vogue again as markets see ‘return of uncertainty’. – All of a sudden all that talk about the great rotation has ceased and bonds are flying high once again.
Trustnet: – Where the value is in fixed income. – FE Alpha Manager Ian Spreadbury says it’s too early to buy back into emerging market debt.
BusinessWeek: – ETF buyers show faith in U.S. growth resisting Ukraine contagion. – Investors are demonstrating confidence in the world’s biggest economy by pouring cash back into risky assets and out of government securities as the Federal Reserve slows stimulus.
WSJ: – Tuesday’s bond selloff came with massive ETF redemptions. – Tuesday’s sell off in the bond market coincided with massive withdrawals from U.S. fixed-income exchange-traded funds.
Record low coupon for the current Euro HY market: 2.25% for the Heidelberg Cement 2019 bond issued yesterday
— Bond Vigilantes (@bondvigilantes) March 6, 2014
BREAKING: Puerto Rico said to set size of #muni deal at $3 billion, w/ debt maturing from 2022 to 2035
— Brian Chappatta (@BChappatta) March 6, 2014
Kiesel Dep CIO: Value in US banks continues to move down the capital structure (e.g. favoring equity vs senior debt) as private sector heals
— PIMCO (@PIMCO) March 6, 2014