Buffett: "I'd short long term bonds if I could"

[klarmaniac]

Over the weekend Buffett said "If I had an easy way, and a non-risk way, of shorting a lot of 20 and 30 year bonds, I would do it. But that's not my game. It can't be done in the quantity that would make sense for us."

It sounds like he's saying if he had less to invest, he might do it. How do you think he might make this investment?

(I'm assuming he means U.S. Treasuries.)

I don't think inverse bond ETFs make sense because I think they aim to match the short-term movements, i.e. there's a lot of leakage on the performance long-term. (Or is this true only for leveraged ETFs?)

I don't think CDSs make sense because the government probably wouldn't default, they'd just inflate themselves out of a crisis.

I'd be looking for something I could hold for 5 or 10 years, and where my loss is limited to my initial investment, and where there's only a one-time (rather than an ongoing) transaction cost for buying or selling it.

I probably won't do it because it's outside my circle of competence (I'm a stock investor), but I want to keep learning and expanding my circle of competence. Any thoughts are appreciated :)

 

[watsa_is_a_randian_hero]

I've been short the ultra bond futures since 2012.  In order to make up for the contango in the futures curve (basically as short the bond futures, rolling the futures costs you the differential between the long bond rate and LIBOR), Ihave also sold call options on TLT when the rates have gotten below 2.5% range, and have sold put options on TLT when the rates were back above 3.5% and approaching 4%. 

 

My break-even is about a rate of 2.76% right now.  I do not have a mortgage but likely will at some point in the future, so I have viewed it partially as a hedge against future mortgage rates.

[gfp]

"How do you think he might make this investment?"

 

The best way for Berkshire / Buffett to make this "investment" is to borrow cheap money long term at BRK.  He mentioned several times this weekend the Euro bonds he sold and their blended rate and duration.  He also mentioned that he may be able to repurchase them for something like 60% of par at some point in the next decade or so.  Obviously that is a small deal for Berkshire though.

 

He has continually taken capital out of BNSF (100% of the earnings), adding long term debt at attractive rates.

 

He will be selling more investment grade long term debt to refinance the Kraft-Heinz balance sheet.

[Jurgis]

Can't you just short TLT?

[frommi]

I have a really hard time understanding why everybody thinks that rates can only go up from here?

[ERICOPOLY]

Perhaps his relatively small amount of earned income is preventing him from qualifying for a 30 year Fannie/Freddie mortgage on the house across the street from him.

[thefatbaboon]

I have a really hard time understanding why everybody thinks that rates can only go up from here?

 

For what it's worth (nothing!) I think rates will remain low-ish for a long time.

 

Technological progress, globalization and job destruction are insane.  Population growth is slowing remarkably all over the place.  And the Pax Americana and unmolested capital formation probably continues.  So I'm thinking of the heydays of Rome and the British Empire...but on steroids. So diminishing risk premia and low rates for my lifetime. Obviously not always and all the time - but thats my two cents on the underlying trend.

[Jurgis]

Perhaps his relatively small amount of earned income is preventing him from qualifying for a 30 year Fannie/Freddie mortgage on the house across the street from him.

 

That was really funny. +1  ;D

[enoch01]

Over the weekend Buffett said "If I had an easy way, and a non-risk way, of shorting a lot of 20 and 30 year bonds, I would do it. But that's not my game. It can't be done in the quantity that would make sense for us."

It sounds like he's saying if he had less to invest, he might do it. How do you think he might make this investment?

(I'm assuming he means U.S. Treasuries.)

I don't think inverse bond ETFs make sense because I think they aim to match the short-term movements, i.e. there's a lot of leakage on the performance long-term. (Or is this true only for leveraged ETFs?)

I don't think CDSs make sense because the government probably wouldn't default, they'd just inflate themselves out of a crisis.

I'd be looking for something I could hold for 5 or 10 years, and where my loss is limited to my initial investment, and where there's only a one-time (rather than an ongoing) transaction cost for buying or selling it.

I probably won't do it because it's outside my circle of competence (I'm a stock investor), but I want to keep learning and expanding my circle of competence. Any thoughts are appreciated :)

 

Mortgage a house.

[Jurgis]

Mortgage a house.

 

Already did.

 

Perhaps I should mortgage another one - I heard there's one available next to Buffett.  ;D

[randomep]

Perhaps his relatively small amount of earned income is preventing him from qualifying for a 30 year Fannie/Freddie mortgage on the house across the street from him.

 

He makes 100k that's a lot in omaha.

[benhacker]

Can't you just short TLT?

 

The rebate on TLT was >3% last I checked (can't check right now).  Basically makes it make no sense since you have to pay coupon + rebate.  Futures or a mortgage is the way for most to go.  You can buy USA CDS, but that's a default play, not a rate play.  A few funds bought rate caps and jump risk derivatives back in like 2010 and wrote them up in their letters... doesn't seem to be a popular trade idea these days though.

 

I think Buffett's comment about a "no risk" way to do this is important.  He would want an upfront option with collateral posting... I think it's hard to imagine a real bullet proof choice.  If you short TLT or short futures (or equivalent) you exposure yourself to dramatic losses is rates go to 0.5% on the 30 year since Treasury debt isn't callable...  So I guess it comes back to a structured product... but then counter party risk come into play, so I guess you have to have like a quarterly netted collateral contract to make it work.

 

I've debated extending my mortgage... not sure if it's worth it.

[Viking]

So Buffett expects interest rates to normalize over the next couple of years (i.e. increase some amount from where they are today). A great way to play rising interest rates is to own US bank stocks. JPM is on track to earn about $5.85/share this year and $6.50 next year. Stock is trading at about $64 or under 10x 2016 earnings estimates. Dividend is $0.44/quarter so yield is about = 2.75%. Stock buybacks are reducing outstanding shares by about 1.5% per year (after dilution from stock option grants).

 

Should interest rates increase in the next year then this will boost earnings in 2016 and earnings estimates of $6.50/share will likely be low. As earnings rise the dividend and stock buybacks will increase. For patient investors US banks look like a pretty decent investment right now. Not risk free.

[ritrading]

"Shorting a bond" is the equivalent of "taking out a loan". Buffett has already been "shorting long term bonds", which can be seen in Berkshire's increase in debt. On the list of outstanding bonds is an issue maturing in 2043. In fact, any company issuing debt is effectively shorting their own bonds.

 

What can't be done easily, is shorting a specific bond (US Treasury). It would mean you're borrowing money at the same interest rate as the US. The closest thing that you can do is to promise to pay someone the coupons that a Treasury Bond would normally provide, but that someone would need to adjust for the fact that you have a higher default rating than the government. Swap contracts like these are arranged all the time, with asymmetrical initial payments to balance out these factors. The details are specific in nature to the credit ratings of both sides.