Buffett noted that the income available from a 10-year US treasury bond at the end of 2020 was 0.93 per cent, which has fallen 94 per cent from the 15.8 per cent yield available in September 1981.
Just this week, the 10-year US treasury yield hit a one year high of 1.61 per cent, but that was far from the yields US investors enjoyed on US long-term treasury in 1981, that the legendary investor suggested in his letter.
“In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future,” Buffett said.
The Chairman of Berkshire Hathaway said that financial strength, coupled with the huge flow of cash Berkshire annually receives from its non-insurance businesses, has allowed his insurance companies to safely follow an equity-heavy investment strategy not feasible for the overwhelming majority of insurers.
“Those competitors, for both regulatory and credit-rating reasons, must focus on bonds,” he said.
Buffett said that insurers, as well as other bond investors, may try to juice the pathetic returns now available by shifting their purchases to obligations backed by shaky borrowers.
“Risky loans, however, are not the answer to inadequate interest rates. Three decades ago, the once-mighty savings and loan industry destroyed itself, partly by ignoring that maxim,” he said.
Buffett said that Berkshire now enjoys $138 billion of insurance “float” – funds that do not belong to us, but are nevertheless ours to deploy, whether in bonds, stocks or cash equivalents such as US treasury bills.
“Float has some similarities to bank deposits: cash flows in and out daily to insurers, with the total they hold changing very little. The massive sum held by Berkshire is likely to remain near its present level for many years and, on a cumulative basis, has been costless to us,” he said.
“That happy result, of course, could change – but, over time, I like our odds. I have repetitiously – some might say endlessly – explained our insurance operation in my annual letters to you,” he said.
