Buffett Cautions Against Buying Long Term USD Bonds
This is another article supporting my belief that long term bonds are not investments I want to take on now. The risks of inflation and low yields seem like a very bad combination.
Buffett Says Avoid Long-Term Bonds Tied to Eroding Dollar, quoting Warren Buffett:
“I would recommend against buying long-term fixed-dollar investments”
“I would much rather own businesses,” he said. “It’s very easy to take away the value of fixed-dollar investments.”
By “take away” he mean the government can undertake policies to “inflate” their way out of a budget mess. By undertaking policies that create inflation (drastically increasing the money supply, borrowing huge amounts of money, running huge trade deficits…) the country can devalue the currency, the US dollar in this case, and thus reduce the effective cost of the payments they have to make on long term bonds (because they pay back the loans with devalued, inflated, dollars). I believe he is right and long term USD bonds are a very risky (inflation risk) investing option today. Of course I have felt the same way for the last 5 years. I own very little in the way of bonds – I do own a bit of TIPS (Treasury Inflation-Protected Securities), in my 401(k) – but stopped allocating money to that class in the last year.
Related: Bill Gross Warns Bond Investors (March 2010) – Bond Yields Stay Very Low, Treasury Yields Drop Even More – Who Will Buy All the USA’s Debt?