“We're not buying corporate bonds of any kind now,” Buffett, 82, said Saturday during an interview with Bloomberg Television's Betty Liu in Omaha, Nebraska, where Berkshire held its annual meeting. “Not at those yields.”
Berkshire held $12.2 billion of corporate bonds as of March 31, according to a quarterly filing issued on May 3. That's down 14 percent from two years earlier. The value of Berkshire's equity portfolio climbed 54 percent to $97.2 billion in the two years ended March 31 as markets rallied and Buffett added shares of International Business Machines Corp.
Yields on debt from corporate securities to Treasuries 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 company debt fell to a record 3.35 percent on May 2, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Index. Yields have averaged 5.87 percent during the past decade.
Apple, maker of the iPhone, sold $17 billion of bonds on April 30 in the biggest corporate offering on record. Buffett, who has said he limited investing in technology companies in part because he doesn't understand them, said the decision to abstain from the Apple offering was part of a broader strategy.
“We're not buying bonds of Apple — we're not buying bonds of anybody,” Buffett said Saturday. “It has nothing to do with them being a tech company. The yields are too low.”
Apple's debt sale included $4 billion of 1 percent, 5-year notes that pay 40 basis points, or 0.4 percentage point, more than similar-maturity Treasuries; $5.5 billion of 2.4 percent, 10-year securities with a relative yield of 75 basis points and $3 billion of 3.85 percent, 30-year bonds paying an extra 100 points, data compiled by Bloomberg show.
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.
Corporate and municipal bonds “were ridiculously cheap relative to U.S. Treasuries” in early 2009, Buffett said in an annual letter to investors in February 2010. “Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble.”
'Brutal' Problem
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 said Saturday during a question-and-answer session at the annual meeting that he pities people who have “clung to fixed-dollar investments.”
“The problem faced by people who have stayed in cash or cash equivalents or short-term Treasuries, it is brutal,” Buffett said. “I don't know what I would do if I were in that position.”
Buffett will collect a 9 percent dividend on the $8 billion preferred stake Berkshire gets as part of a deal he struck in February with 3G Capital to take ketchup-maker HJ Heinz Co. private. Heinz is rated BBB+ by Standard and Poor's, the eighth-highest of 10 investment grade levels. Apple has a AA+ grade, the second highest.
Berkshire has been burned by bets on lower-rated corporate debt. The cost of impairments was $85 million in the first quarter, compared with $337 million a year earlier, Berkshire said last week. The losses in both periods were related to bonds issued by Texas Competitive Electric Holdings.
Bloomberg News
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