Warren Buffett: BOND YIELDS WERE TOO LOW 📉 Bonds were bound to sell off, and yield a higher return 💰

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Warren Buffett explains in this video that the yield on U.S. government bonds would rise in the future.

When Warren Buffett made this statement in 2013, the yield on the 10-year U.S. government bond was around 1.8%.

Today (October 2023), you can almost earn 5% per year by lending money to the U.S. government for 10 years.

Many older individuals have a significant portion of their money invested in government bonds and have thus experienced significant declines in their holdings in recent months.

The yield on government bonds has increased because the U.S. central bank is no longer purchasing government bonds, as they have done for many years (what we call Quantitative Easing).

Today, central banks are selling off their holdings of government bonds as a tool in the fight against high inflation.

In addition to the central bank no longer buying government bonds, more government bonds are also being offered today than before because the annual U.S. budget deficit has increased.

Furthermore, inflation is generally higher, and therefore investors demand a higher return on their fixed-dollar investments.

Last but not least, interest rates around the world have also risen, including in Japan. This is why the Japanese now prefer to buy their own government bonds rather than lending money to the Americans. This way, the Japanese also avoid currency risk.

Here's what Warren Buffett and Becky Quick are discussing in the video.
There’s an article in today’s Wall Street Journal that talks about Bill Gross and other people who have been very bearish on bonds. Your take on what Bill Gross has been pointing out on this is what?

BUFFETT: In terms of— terms of bonds, some day they will sell the yield a whole lot more than they’re yielding now. I— I don’t know when— when it’ll happen.

It’s going to happen. And question is always when. I’m no good on that. The question is to what degree it happens. But you could have interest rates very significantly different than what they are now— in some reasonable period in the future.

It will happen. In terms of stocks, you know, stocks are reasonably priced. They were very cheap a few years ago. They’re reasonably priced now. But stocks grow in value over time because they retain earnings and they expand. I like owning stocks. I do not like owning bonds now. There could be conditions under which we would — we would own bonds. But— they’re conditions far different than what exist now.

BECKY: Well— it’s always been— standard investment advice that you have some sort of a blend of stocks and bonds so that you keep things for the man on the street, for the average investor. Joe talked to a retirement specialist who told him he should be 40% in bonds. I just wonder if this is a very different time.

BUFFETT: No, I— you shouldn’t be 40% in bonds.
I would have enough cash on hand so they feel comfortable, and then the rest in equities. I would have productive assets. I would favor those enormously over fixed dollars investments now, it’s silly— to have some ratio like 30 or 40 or 50% in bonds. They’re terrible investments now.

BUFFETT: I bought bonds back in the early ’80s. We bought— we made a lot of money and we bought zero coupon bonds. The price of everything determines its attractiveness.

The price of stocks was way down a few years ago. The news was terrible, but the stocks were cheap, you know. News is better now. Stocks are higher. They’re still not— they’re not ridiculously high at all, and bonds are priced artificially. You’ve got some guy buying $85 billion a month.
That will change at some point. And when it changes, people could lose a lot of money if they’re in long-term bonds.

BECKY: Lee Cooperman’s point when he talked to us about it was that this is kind of like bending down to pick up a quarter in front of a steamroller.

BUFFETT: Yeah, well, it— I’m not sure it’s even a quarter.

BECKY: If you look at the pension funds. A lot of them— are being forced out into other places to try and seek the yield. Because they’ve promised or they’re expected to return around eight percent a year or something just to meet their obligations. It’s a much more difficult game.

BUFFETT: Yeah, chasing yield is crazy. You know, just because you’d like to earn eight percent, (LAUGH) or— or— or you’d like to earn ten percent or you’d like to earn six percent. The world isn’t going to adapt to that. You— you have to think about what is the most intelligent thing to do and if— if that produces five p— percent or six percent, that’s the best you’re going to do.

But to— to get enticed into some investment that— is riskier that you don’t understand because somebody promises you a higher yield— I mean, I can— you know, I can take it down to the waterfront or something like that and they’ll promise you 15 percent or something. (LAUGH) And it just doesn’t make any sense at all. And— but, pension funds— you know, they— they haven’t been that well managed over time.