Why Are Berkshire Hathaway Bonds Trading At Lower Yields Than Treasury Bonds?

Berkshire Hathaway
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The title might sound crazy but that is exactly what Bloomberg News reported yesterday. A story on bloomberg.com states that bonds sold by Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) are trading at “3.5 basis points less than Treasuries of similar maturity”.

The story is very strange. Treasuries are supposed to be the safest securities. They are considered a risk free return on your money. So why are Berkshire Hathaway’s bonds considered less risky than the US government’s?

I think the answer is that the US is issuing so much debt that people see more risk in owning US government debt than owning debt of a solid company with a fortress balance sheet like Berkshire Hathaway. The US debt level keeps climbing and it does not look like the budget will be balanced any time in the foreseeable future. Even if you believe the CBO estimates that the current Health Care bill will cut the deficit by 1.3 trillion over the next 20 years that is a drop in the bucket compared to the budget deficits are projected to be for at least the next ten years of approximately $10 trillion dollars. In addition it is almost impossible to predict 20 years in the future I find it comical that the CBO gives an estimate that far in advance.

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Therefore I personally would feel more comfortable owning bonds from a company like Berkshire Hathaway than Uncle Sam.

However, I left out one detail that makes this really bizarre. The 3.5 basis spread is on two year notes from Berkshire Hathaway versus two year treasury notes.

To read the rest of my article click here

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