Buffet’s Touch Is Golden With Bonds, Too Timing On Multibillion Dollar Treasury Bond Purchase Turned Out To Be Perfect

Warren Buffett, known as one of the savviest investors in the stock market, is now showing he’s no slouch when it comes to bonds, either.

Buffett’s Berkshire Hathaway Inc. bought some $10 billion face amount of zero-coupon Treasury bonds due in about 20 years for $2 billion over several weeks in August, according to Wall Street firms familiar with the purchases. The move, which was made while stocks were climbing, represented a big bet on bonds because zeroes are among the most sensitive to changes in interest rates.

So far, that’s been a good wager, as bonds rallied while stocks sputtered.

“Buffett’s timing was impeccable,” said Richard Schwartz, who oversees about $21 billion in bonds for New York Life Asset Management in Parsippany, New Jersey.

While it isn’t known if Buffett sold any or all of Berkshire’s zero coupon holdings since August, any that are still on the company’s books are showing handsome gains.

For instance, had Buffett bought $1 million of zero-coupon bonds due Aug. 15, 2017 on Aug. 12 - when government yields were at their high for the month - his investment would now be worth about $1,155,680. That represents a return of more than 15 percent. By contrast, a $1 million investment in the stocks comprising the Standard & Poor’s 500 index on Aug. 12 would now be worth just $985,386 - representing a loss of 1.46 percent including reinvested dividends.

Zeroes soared along with other Treasuries recently, as tumbling stocks worldwide sent investors scurrying to the safety of U.S. government debt. The drop in stocks also raised the prospect for slower growth, which would lessen the chance for faster inflation and a Federal Reserve rate increase.

Marc Hamburg, a spokesman for Omaha, Nebraska-based Berkshire, said the firm doesn’t discuss its investments and declined to comment further.

Zero coupon bonds, created by Wall Street firms by separating the principal and interest portions of U.S. Treasury bonds, are sold at a deep discount to their principal amount. They pay no interest over the life of the bond, only the principal amount at maturity.

Zeroes are typically the quickest to react to changing expectations about the direction of interest rates, resulting in large swings in their value. When rates rise, zero-coupon bonds do worse than other fixed-income securities because holders don’t receive interest payments to reinvest at the new, higher rates. When interest rates are falling, as they are now, the locked in reinvestment level helps them outperform their peers.

Of course, stocks have still done better than bonds for the year to date because of robust corporate earnings and growth in the overall economy. The S&P 500 is up almost 23 percent since the beginning of the year to 909.69, while the benchmark 30-year bond has gained just 12.1 percent, including price gains and interest.

It’s not clear whether Berkshire’s purchase of zeroes means Buffett is less optimistic about stocks. Nor is it known if Buffett took advantage of the stock market’s recent turbulence to add to his equity holdings and shed some of his zeroes.

What’s more, stocks and corporate holdings still make up the bulk of the investments of Berkshire, controlled by billionaire Buffett. Berkshire’s stockholdings include American Express Co., Coca-Cola Co., Walt Disney Co., and McDonald’s Corp.

Still, Buffett’s decision to load up on bonds back in August is looking astute, given subsequent market moves. Some said the move may mean Buffett is confident subdued inflation will keep yields low for some time to come, because he typically invests for the long haul.