Warren Buffett, the famed investor and chairman of Berkshire Hathaway, is in the news. Yet, contrary to much of his recent advice, he’s massively increased his exposure to short-term U.S. Treasuries. The conglomerate is now responsible for financing an astounding 5% of all outstanding short-term Treasuries. This really illustrates their deep-seated belief in the surety and yield these securities offer, particularly when markets are turbulent.
In recent months, investors have flocked to short-term Treasury bonds, which is exactly what Buffett has been doing. The yield on the three-month Treasury bill is now almost 4.3% on an annualized basis. This contrasts sharply with what’s happening with government bonds; right now the two-year Treasury yields 3.9%. In sharp contrast, the yield on longer-duration Treasuries, such as those with durations of more than seven years, is yielding only 4.1%. This divergence has led financial advisors such as Todd Sohn to advise their clients to avoid longer-duration Treasuries.
Demand for short term Treasury bills Berkshire Hathaway has been vastly increasing its stake in Treasury bills. This decision illustrates how they plan to capitalize on high yields available in a dynamic bond market. This pivot to shorter durations, market analysts say, is notable as long-term Treasuries have had negative performance going back to September. The bond market is facing continued volatility in the yield curve, particularly in longer maturities. Take the 20-year Treasury which has gone from negative to positive territory five times so far this year.
In practical terms, this means investors have been churning towards exchange-traded funds (ETFs) that primarily emphasize short-term Treasuries. So far, the iShares 0-3 Month Treasury Bond ETF (SGOV) is easily the best performing ETF mentioned. In a surprising twist, the SPDR Bloomberg 1-3 T-Bill ETF (BIL) joined BIL in breaking into the top 10 ETFs for investor flows this year. Together these two funds have attracted more than $25 billion in assets. This increase goes to show the growing demand for more short-term investments during a time of uncertainty.
Todd Sohn highlights that “the only other time that’s happened in modern times was during the Financial Crisis,” referring to the current surge in short-term Treasury investments. He emphasizes that “it is hard to argue against short-term duration bonds right now,” underscoring the appeal of these investments as a safe haven during periods of increased volatility.
Joanna Gallegos, another market analyst, notes that “the volatility has been on the long end,” contrasting it with the relative stability observed in shorter-duration bonds. She further states, “there’s lots of concern and volatility, but on the short and middle end, we’re seeing less volatility and stable yields.” No wonder most investors are so optimistic. They are afraid to make long-term commitments because the short and long-term economic landscape is too volatile.
In this environment, shorter-duration bonds make a lot of sense. As many experts have cautioned, in the process, investors could be overlooking the important role fixed income should play in their total portfolio strategy. Gallegos warns that “investors are not paying enough attention to fixed income, including Treasuries, as part of their portfolio mix,” suggesting a need for more balanced investment approaches.
In doing so, Buffett is truly practicing what he preaches. His strategy of pushing more investors to safety into short-term Treasuries could be. The volatility in the bond market right now is unprecedented. This shift makes some of these instruments highly appealing as they offer better certainty of yield over longer-duration options.