Warren E. Buffett, the billionaire chairman and chief executive of Berkshire Hathaway Inc., recently said he isn't investing in corporate debt, including Apple Inc.'s record offering, because yields are too low.
“We're not buying corporate bonds of any kind now,” Mr. Buffett, 82, said May 4 during an interview with Bloomberg Television in Omaha, Neb., where Berkshire held its annual meeting. “Not at those yields.”
Berkshire held $12.2 billion in corporate bonds as of March 31, according to a quarterly filing issued May 3. That's down 14% from two years earlier. The value of Berkshire's equity portfolio climbed 54 percentage points to $97.2 billion in the two-year period ended March 31 as markets rallied and Mr. Buffett added shares of International Business Machines Corp.
YIELDS TUMBLE
Yields on debt from corporate securities to Treasuries have tumbled as the
Federal Reserve has slashed interest rates and bought bonds to help the economy recover from a
recession. The payout rate on dollar-denominated company debt fell to a record 3.35% on May 2, according to the
Bank of America Merrill Lynch U.S. Corporate & High Yield Index. Yields have averaged 5.87% during the past decade.
Apple (AAPL), maker of the iPhone, sold $17 billion in bonds April 30 in the biggest corporate offering on record. Mr. Buffett, who has said he limits investing in technology companies in part because he doesn't understand them, said the decision to abstain from the Apple offering was part of a broader strategy.
“We're not buying bonds of Apple — we're not buying bonds of anybody,” Mr. Buffett said May 4. “It has nothing to do with them being a tech company. The yields are too low.”
Apple's debt sale included $4 billion in 1% 5-year notes that pay 40 basis points, more than similar-maturity Treasuries; $5.5 billion in 2.4% 10-year securities with a relative yield of 75 basis points and $3 billion in 3.85% 30-year bonds paying an extra 100 points, data compiled by Bloomberg show.
POPULARITY OF BONDS
Investors have flocked to bonds since the 2008 financial crisis, when the S&P 500 fell about 38% in a year.
Corporate and municipal bonds “were ridiculously cheap relative to U.S. Treasuries” in early 2009, Mr. Buffett said in an annual letter to investors in February 2010. “Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble.”
The Fed has held its target interest rate for overnight loans among banks between zero and 0.25% since December 2008 and is buying $85 billion in bonds a month. Mr. Buffett said May 4 during a question-and-answer session at the annual meeting that he pities people who have “clung to fixed-dollar investments.”
“The problem faced by people who have stayed in cash or cash equivalents or short-term Treasuries, it is brutal,” Mr. Buffett said. “I don't know what I would do if I were in that position.”
SAUCY GAINS
Mr. Buffett will collect a 9%
dividend on the $8 billion in preferred stake Berkshire gets as part of a deal he struck in February with 3G Capital to take ketchup maker H.J. Heinz Co. (HNZ) private. Heinz is rated BBB+ by Standard and Poor's, the eighth-highest of 10 investment grade levels. Apple has a AA+ grade, the second-highest.
Berkshire has been burned by bets on lower-rated corporate debt. The cost of impairments was $85 million in the first quarter, compared with $337 million a year earlier, Berkshire said last week. The losses in both periods were related to bonds issued by Texas Competitive Electric Holdings.
