Buffett cuts bond-holding duration on inflation warning

After warning that deficit spending could force inflation higher, Warren E. Buffett shortened the duration of bonds held by his Berkshire Hathaway Inc.

Twenty-one percent of holdings, including Treasuries, municipal debt, foreign-government securities and corporate bonds, were due in one year or less as of June 30, Berkshire said in a filing Aug. 6. That compares with 18% on March 31, and 16% a year earlier.

“It may be a sign that Buffett expects interest rates to start rising, maybe sooner than the conventional wisdom,” said Meyer Shields, an analyst at Stifel Nicolaus & Co. who has a “sell” rating on Berkshire.

Inflation has fallen to a 44-year low even as the Federal Reserve more than doubled its balance sheet in two years to $2.33 trillion to help draw the economy out of recession. The two-year Treasury yield fell to a record low after a jobs report showed that companies last month hired fewer workers than forecast.

Bill Gross, managing director and co-chief investment officer at Pacific Investment Management Co. LLC, advised investors to buy longer-dated maturities.

Mr. Buffett, 79, last year urged Congress to guard against inflation as the U.S. economy returned to growth. In an August 2009 Op-Ed in The New York Times, the Berkshire chief executive said that the government must address the “monetary medicine” that was pumped into the financial system after the 2008 crisis.

“The United States is spewing a potentially damaging substance into our economy — greenback emissions,” Mr. Buffett wrote. “Unchecked greenback emissions will certainly cause the purchasing power of currency to melt.”

Mr. Buffett didn’t respond to a message left with an assistant.

RECORD DEFICITS

The Obama administration forecasts that the federal government will run a record $1.47 trillion budget deficit this year. Since the end of 2007, U.S. borrowing to support the economy has raised the outstanding public Treasury debt to $8.18 trillion, an 80% increase.

Mr. Buffett accumulated the world’s third-biggest personal fortune through decades of successful stock picks and takeovers. Berkshire maintains a fixed-income portfolio valued at about $32 billion to back claims against storm damage and car crashes covered by insurance units such as Geico Corp. and General Reinsurance Corp.

Berkshire’s holdings of fixed-income securities due in one year or less advanced 8.5% in three months to $6.08 billion on an amortized cost basis as of June 30. Bonds maturing after a year fell 8.6% to $22.7 billion during the period.

In each of the past three quarters, holdings of bonds due in 12 months or less advanced, while securities maturing in more than a year slipped.

INFLATION BIAS

“[Mr. Buffett is] probably biased toward inflation down the road,” said Glenn Tongue, a partner at T2 Partners LLC, a Berkshire shareholder. “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.”

The rate of increase for the consumer price index, excluding food and energy, held at 0.9% for the three-month period ended June 30.

The spread between yields on 10-year notes and Treasury inflation-protected securities shows that money managers expect consumer prices to increase an average of about 1.8% annually over the next 10 years, down from a median expectation of about 2.2% over the past 10 years.

Berkshire’s fixed-maturity portfolio was valued at $32.1 billion as of June 30, compared with $35.1 billion a year earlier. Holdings of non-U.S. government debt dropped 7.7% to $10.2 billion in that period, and corporate bonds declined 3.9% to $12.7 billion.

Investments in Treasuries and agency securities slipped 7.3% to $2.25 billion.

Investments in equities had a market value of $54.7 billion as of June 30, led by holdings of The Coca-Cola Co., Wells Fargo & Co. and American Express Co. Berkshire had a cash hoard of about $28 billion.