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Report: Buffett's Bond Investments Indicate He Fears Inflation

By    |   Tuesday, 10 Aug 2010 10:08 AM

While the worries of most investors have shifted to deflation from inflation, Warren Buffett apparently isn’t one of them — at least as of June 30, anyway.

In the second quarter, his Berkshire Hathaway shortened the duration of its bond holdings, Bloomberg reports. The firm has all kinds of bonds, including Treasuries, municipals, corporate bonds and foreign bonds.

Coming after repeated warnings that deficit spending will ultimately spark inflation, the move points to a fear of price hikes on the part of Buffett.

When inflation and interest rates rise, long-duration bonds generally fall more than short-duration ones.

As of June 30, 21 percent of Berkshires bonds were due in a year or less, compared with 18 percent as of March 31 and 16 percent on June 30, 2009, according to a recent regulatory filing.

“It may be a sign that Buffett expects interest rates to start rising, maybe sooner than the conventional wisdom,” Meyer Shields, an analyst at Stifel Nicolaus, told Bloomberg.

Glenn Tongue, a partner at Berkshire shareholder T2 Partners, agrees. “He’s probably biased toward inflation down the road,” Tongue told Bloomberg of Buffett.

“He would want to gradually make the duration decline because in an inflationary environment it’s a longer-term instrument that will be the most hit.”

Buffett has warned about the ramifications of the exploding U.S. debt burden.

“A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it’s going to inflate its way out of the burden of that debt,” he told CNBC last year.

And he wrote in The New York Times, “Unchecked greenback emissions will certainly cause the purchasing power of currency to melt.”

The Congressional Budget Office projects that government debt will total 62 percent of GDP by Sept. 30. The Obama administration predicts the budget deficit will hit a record $1.47 trillion this year, about 10 percent of GDP.

But the slowdown of the economic recovery has many experts more worried about deflation than inflation. Growth slumped to 2.4 percent in the second quarter from 3.7 percent in the first quarter.

"Deflation isn't just a topic of intellectual curiosity, it's happening," Bill Gross, chief investment officer at Pimco, told The Wall Street Journal. “It's an uncertain world that's tipping toward deflation."

In the U.S., consumer prices rose only 1.1 percent in the 12 months through June, and actually fell 0.1 percent annualized over the past two years.

Federal Reserve officials also are concerned.

"We have to be ready for the idea that if there's further shocks to the economy, we could get into a deflationary scenario," St. Louis Fed President Bullard James Bullard told Reuters.

If the economy deteriorates, and the Fed doesn’t respond adequately, we could face Japan-style deflation, he says.

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While the worries of most investors have shifted to deflation from inflation, Warren Buffett apparently isn t one of them at least as of June 30, anyway. In the second quarter, his Berkshire Hathaway shortened the duration of its bond holdings, Bloomberg reports. The...
warren,buffett,bonds,inflation
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2010-08-10
Tuesday, 10 Aug 2010 10:08 AM
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