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Buffett Asset Manager: Safe-Nation Bonds Are Way to 'Grow Poor'

Tuesday, 10 July 2012 03:14 PM

General Re-New England Asset Management Inc., a unit of Warren Buffett’s Berkshire Hathaway Inc., said sticking with the bonds of the nations perceived to have the best credit will drain wealth as inflation saps value.

“Sovereign bond yields in putatively safe countries are an excellent way to grow poor, at accelerating rates over time,” GR-NEAM Chief Investment Officer John Gilbert wrote in a newsletter on the unit’s website.

Gilbert’s remarks echo comments by Buffett in a February letter to shareholders of Omaha, Nebraska-based Berkshire that bonds are “dangerous” assets because low interest rates may not compensate for the risk that purchasing power will be eroded. Treasury 10-year note yields fell to a record low of 1.4387 percent on June 1 amid concern Europe’s two-year debt crisis is worsening and U.S. employment growth is slowing.

Federal Reserve Bank of St. Louis President James Bullard said the U.S. fiscal position is as weak as some euro-area countries’ and lawmakers must take “dramatic” measures to tackle it and restore confidence. While the U.S. economy is growing, the pace is “sluggish,” he said in prepared remarks for a speech in London today.

Gilbert said the economy is still suffering from excessive debt accumulated by U.S. households.

“The most reliable road to deleveraging, then, is rising GDP including currency debasement if necessary or expedient,” Gilbert wrote in the document, dated July 2012. “Central banks can be expected to play their role.”

Term Premium

By some measures Treasuries are at about the most expensive levels ever. The term premium, a model created by economists at the Federal Reserve, hit a record negative 0.961 percent Tuesday. A reading below zero indicates investors are willing to accept yields below what’s considered fair value.

The German 10-year bund rate dropped to a record low of 1.13 percent on June 1, more than 2 percentage points below its 3.53 percent average of the past decade.

GR-NEAM had $67.7 billion in unaffiliated assets under management as of March 31, according to its website. The Farmington, Connecticut-based unit primarily serves insurers.

Buffett has said he prefers investing in companies, either through takeovers or by buying stock. Berkshire had $89.1 billion in equities at the end of the first quarter, including the largest holdings in Wells Fargo & Co. and Coca Cola Co. That compares with about $31.7 billion in fixed-maturity securities.

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Tuesday, 10 July 2012 03:14 PM
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