Sure sign of inflation? Buffett’s latest maneuver

Warren Buffett’s Berkshire Hathaway Inc. sold $1.5 billion of mostly fixed-rate debt to retire floating-rate notes at a time when government bond yields are rising and the U.S. is showing signs of economic improvement.

A unit of Buffett’s Omaha, Nebraska-based holding company issued $750 million of 4.25 percent, 10-year notes yesterday priced to yield 95 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg. It also sold $375 million of three-year, 1.5 percent notes and the same amount of floating-rate debt yielding 33 basis points more than the three-month London interbank offered rate, the data show.

“The market scrutinizes Buffett’s moves very closely and this would indicate he’s thinking interest rates in the longer term may go up,” Vijay Chander, Hong Kong-based head of credit strategy at Standard Chartered Plc, said in a phone interview. “That’s consistent with our house view that the U.S. economy is improving.”

The world’s most successful investor locked in interest payments on most of the debt as a report showed U.S. manufacturing expanded in December at the fastest pace in seven months, spurring confidence the world’s biggest economy is gaining momentum. Former Federal Reserve Governor Frederic Mishkin said yesterday that while the central bank will complete its $600 billion bond-purchase program, a third round of so- called quantitative easing to spur growth is unlikely.

The yield on the benchmark 10-year Treasury note was at 3.35 percent today after falling to as low as 2.33 in October, according to data compiled by Bloomberg. It will advance to 3.53 percent by year-end, according to a Bloomberg survey of 66 banks and securities companies, with the most recent forecasts given the heaviest weightings.

Berkshire will use money from the new bonds to repay floating-rate notes maturing this year, it said in a regulatory filing yesterday. It has $1.5 billion due on Jan. 11, Bloomberg data show. Buffett didn’t immediately respond to a request for comment e-mailed to his assistant, Carrie Kizer, outside normal business hours in the U.S.

The company, whose holdings range from Burlington Northern Santa Fe Corp. to General Re Corp. and Fruit of the Loom Ltd., last sold public debt in December when it issued $500 million of 2.45 percent, five-year notes at a spread of 85 basis points, or 0.85 percentage point, according to data compiled by Bloomberg.

In the floating rate portion of the new debt Berkshire is paying 10 basis points less than in its last benchmark sale of similar-tenor securities. The company sold $2 billion of one- year securities, $1.1 billion of two-year notes and $1.2 billion of three-year debt in February, the data show. The 2013 notes, which priced at a spread of 43 basis points more than three- month Libor, traded at 100.55 cents on the dollar yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

When Buffett announced the $26 billion acquisition of Burlington Northern Santa Fe in November 2009, he described the railroad company as an “all-in wager” on the U.S. economy.

Yesterday the Standard & Poor’s 500 Index rallied to its highest close since Sept. 3, 2008 after the Institute for Supply Management said its manufacturing index climbed to 57 last month from 56.6 in November. Increased spending by American consumers and business investment is helping drive production gains at factories that make up about 11 percent of the U.S. economy.

Investors demand 166 basis points of extra yield to hold U.S. corporate debt instead of government securities, according to Bank of America Merrill Lynch’s U.S. Corporate Master Index.

Goldman Sachs Group Inc., JPMorgan Chase & Co. and Wells Fargo & Co. managed yesterday’s bond sale, Berkshire said in its regulatory filing.

–Bloomberg News–

Related Topics: Inflation