Buffett warns of inflation, cuts duration of bonds held

(NEW YORK) Warren Buffett shortened the duration of bonds held by Berkshire Hathaway after warning that deficit spending could force inflation higher.
Twenty-one per cent 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 last week. That compares with 18 per cent on March 31, and 16 per cent at the end of last year's second quarter.
'It may be a sign that Buffett expects interest rates to start rising, maybe sooner than the conventional wisdom,' Meyer Shields, an analyst in Baltimore at Stifel Nicolaus & Co said.
Inflation has fallen to a 44-year low even as the Federal Reserve more than doubled its balance sheet in two years to US$2.33 trillion to help draw the economy out of recession.
A US jobs report last week showing that companies hired fewer workers than forecast in July pushed the two-year Treasury yield to a record low. Bill Gross, founder of Pacific Investment Management, advised investors to buy longer-dated maturities.
Mr Buffett, 79, urged Congress last year to guard against inflation as the US economy returned to growth. In an August 2009 op-ed in the New York Times, the Berkshire chief executive said 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.'
Berkshire maintains a fixed-income portfolio valued at about US$32 billion to back claims against storm damage and car crashes covered by insurance units like Geico Corp and General Re.
'He's probably biased toward inflation down the road,' said Glenn Tongue, a partner at T2 Partners LLC. '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.' - Bloomberg