Buffett Now a Better Risk Than U.S. Treasury Debt: Bond Buyers

Monday, 22 Mar 2010 03:12 PM

By Dan Weil

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Bond market yields indicate that investors feel more comfortable lending money to Warren Buffett’s Berkshire Hathaway than to the U.S. government.

Two-year notes issued by Berkshire reportedly yield 3.5 basis points less than two-year Treasuries. The Treasuries yield 0.925 percent, compared to 0.89 percent for Berkshire paper.

Berkshire isn’t the only blue-chip company whose debt carries lower rates than Treasuries. The same has been true in recent weeks for Procter & Gamble, Johnson & Johnson and Lowe’s.

The situation is extremely rare in the history of the bond market.

“It’s a slap upside the head of the government,” Mitchell Stapley, chief fixed-income officer at Fifth Third Asset Management, told Bloomberg.

“It could be the moment where hopefully you realize that risk is beginning to creep into your credit profile and the costs associated with that can be pretty scary.”

Of course it’s the mushrooming U.S. budget deficit and debt burden that weigh on Treasuries.

The deficit totaled $1.42 trillion last year and raised concerns whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first-quarter rally in Treasuries as the economy improves, economists say.

Meanwhile, the United States and Britain are more likely than Germany and France to witness an embarrassing downgrade of their top debt rating, agency Moody's Investors Service recently said.

In a quarterly report assessing the prospects of the triple A-rated countries, including Spain and the "less fiscally challenged" Denmark, Finland, Norway and Sweden, Moody's warned that the economic recovery remained fragile in many advanced economies, the Associated Press reported.

"This exposes governments to substantial execution risk in the implementation of their exit strategies, which could yet make their credit more vulnerable," says Arnaud Mares, senior vice president in Moody's sovereign risk group and the main author of the report.

Governments and central banks are looking at when and how to unwind their massive stimulus measures, which include historically low interest rates, liquidity provisions, industry incentives and increased spending. Although some experts warn that exiting these policies too early risks creating a new economic downturn, they are also straining government finances.

For now though, Moody's said the triple A governments don't face an immediate threat to their top ratings as the servicing of the debt remains manageable — the top credit rating reduces the interest payments countries have to pay on their debt when going to the bond markets to raise capital.

However, debt affordability is "most stretched" in Britain and the United States, Moody's said.

"At the current elevated levels of debt, rising interest rates could quickly compound an already complicated debt equation, with more abrupt rating consequences a possibility," said Pierre Cailleteau, managing director of Moody's sovereign risk group.

However, Daniel Shackelford of T. Rowe Price said “there’s no natural law that says a Treasury has to yield less than a corporate. It can go on for much longer than you may think.”

To be sure, Treasury bonds have actually performed well recently.

"It's a flight to quality. People believe in the resiliency of our dollar and of our economy," Larry Rosenthal, president of Financial Planning Services, told CNBC.

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