Home / Federal Reserve / Warren Buffett Says “Bonds Are Bad Investments.” This Upsets Bond Promoters.
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Warren Buffett Says “Bonds Are Bad Investments.” This Upsets Bond Promoters.

Written by Gary North on May 30, 2013

Bonds pay little interest, thanks to (1) the Federal Reserve’s QE3 program (2) the banker’s unwillingness to lend and the borrowers’ unwillingness to borrow.

Future price inflation will raise rates. Rising rates will lower the market price of bonds. Buffett sees what is coming. He prefers stocks.

One plain vanilla promoter of bonds is upset. He thinks older people need lots of bonds. But his words are not reassuring. He writes:

“Now, a bond portfolio should certainly be designed sensibly. With rates so low, the danger, of course, is an eventual rise that would decrease principal values. But I personally believe that issue is manageable — keep maturities short so that you can potentially reinvest in new bonds as rates rise.”

But short-term bonds pay almost no interest. What’s the point?

“To the protestation that rates are so low that short-term bonds would lose out to inflation, I say that that’s manageable, too. First of all, even if they did lose a point or so to inflation, that’s better than experiencing a 10% correction in the stock market and then panicking out, as many people – especially older people – would do.

And the fact is that short-term bond investments aren’t necessarily being reduced by inflation today. The Vanguard Short-Term Corporate Bond Index ETF (VCSH) and the SPDR Barclays Short Term Corporate Bond ETF (SCPB) each currently yield 1% to 2% (as of 5/17), with the latest monthly inflation number (March) at 1.5%.”

You can get that at a local credit union, and your money is insured by the government. Why buy bonds, which are not insured?

Bernanke’s FED has set a trap for bond investors. Buffett sees this. The singers of old songs that were popular before 2008 still sing them. I don’t think they should even hum them.

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