Tags: warren buffett | treasurys | inflation | invest

Buffett Joins Treasurys in Being Surprised by Lack of Inflation

Thursday, 07 May 2015 08:42 AM

Six years after the Federal Reserve started buying Treasurys, Warren Buffett is puzzled by the low inflation rate in the U.S. So is the bond market.

Buffett, the billionaire chairman of Berkshire Hathaway Inc., said Monday on CNBC he expected significant inflation by now because of the measures taken to revive the economy after the last recession. “That has not happened,” he said. Buffett also said he thinks long-term bonds are overvalued.

A surge in yields worldwide this month shows investors are starting to get a whiff of inflation, though debt markets don’t always prove to be an accurate indicator. Two years ago, a market metric called the breakeven rate projected consumer prices would rise at an annual pace of about 2.3 percent over the following 24 months. The average has been 1.3 percent, and the figure plunged to negative levels this year.

“Consumption behavior has changed since the financial crisis,” said Will Tseng, a portfolio manager in Taipei at Mirae Asset Global Investments Co. which oversees $64 billion. “Corporates don’t want to invest. Consumers don’t want to spend. I don’t think inflation will be a problem.”

The difference between the outlook gauge and the current price index widened in April to the highest level since 2009. Inflation is in the doldrums even after the Fed spent 2009 to 2014 buying Treasury and mortgage-backed debt, driving down benchmark borrowing costs, to support the economy during and after the biggest downturn since the Great Depression. It has held its benchmark interest rate at zero since 2008.

Rate Prospects

Now, with the labor market improving, Fed officials are considering raising their benchmark interest rate, which will make it even tougher for them to push inflation to their 2 percent target after the price of crude oil tumbled 40 percent in the past year.

Policy makers will probably act in December, according to a Morgan Stanley index.
Bonds in the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index had an effective yield of 1.31 percent, climbing from April’s low of about 1.1 percent. It’s still less than the average of 2.35 percent over the past decade.

Fed Bank of Chicago President Charles Evans said this week policy makers should wait for more evidence that wages are advancing before moving, and he repeated his call to hold borrowing costs near zero until 2016. Under the Fed’s rotation system, Evans votes on monetary policy this year.

Earnings Slow

Average hourly earnings probably rose 2.3 percent in April from the year before, based on a Bloomberg survey of economists before the Labor Department issues the report May 8. The figure has averaged 2 percent during the past half decade, after being as high as 3.6 percent in 2008.

Slowing inflation is also showing up in housing. While home prices based on 20 U.S. cities increased 5 percent year-on-year in February, the figures is below the 13 percent pace generated 12 months earlier, based on the S&P/Case-Shiller index of property values.

For anyone who was counting on inflation to kick start the price of their homes or their salaries, the decline in consumer prices this year suggests that won’t happen anytime soon. The good news is that a touch of disinflation can help keep costs in check when the time comes to pay the bills.

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Six years after the Federal Reserve started buying Treasurys, Warren Buffett is puzzled by the low inflation rate in the U.S. So is the bond market.
warren buffett, treasurys, inflation, invest
Thursday, 07 May 2015 08:42 AM
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