Warren Buffett said Treasuries are in a bubble right now. What does that mean?
A: Warren Buffett's annual letters to Berkshire Hathaway investors are
always worth reading. The letters are one part common sense, one part
business sense and one part shareholder information.
In one section, Buffett points to the current rush into U.S. Treasury
bills, notes and bonds as the latest bubble in capital markets. He
writes: "When the financial history of this decade is written, it will
surely speak of the Internet bubble of the late 1990s and the housing
bubble of the early 2000s. But the U.S. Treasury bond bubble of late
2008 may be regarded as almost equally extraordinary."
Yes, you read that right. Buffett is saying the value of U.S. Treasury
securities has been pushed to bubble levels. Certainly, panic over the
health of the financial system has pushed investors to buy dollars and
load up on Treasuries.
When investors rush to buy Treasuries, they push prices up and yields
down. In fact, at one point last year, buyers in short-term Treasuries
were willing to accept negative yields. That is, they were willing to
take back less money than they were lending, if only to be assured
that they would get most of their money back.
Adding to the risks facing Treasuries is the fact inflation could be a
side-effect of the government's massive borrowing and spending to
stimulate the economy. If inflation kicks in, Treasury prices will
likely suffer. If at the same time investors choose to escape this
safe haven, Treasury prices could be in for a big fall.
What does all this mean? It means you shouldn't lock up all your money
in long-term Treasuries.
If interest rates rise, you could see the prices of your Treasuries
fall. And remember, when buying bonds, it's a good idea to ladder your
portfolio.
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