2005: Why are treasury yields so low?

AUDIENCE MEMBER: Hi, I’m Steve Casbell (PH) from Atlanta.
With signs of inflation, you know, in commodities and oil, why do you think the 10-year is still — you know, the yield is 4.2 percent? And, you know, is it that the market sees signs of deflation coming in the future?

And in addition to that, if you thought rates would stay at this level for an extended period, would you have a more favorable view of the market?

WARREN BUFFETT: Well, the answer to the second part is yes. I mean, if somebody guaranteed me that the 10-year rate would never go above 4.2 percent for the next 50 years, we would have to readjust, recalibrate every decision we make around Berkshire. I think it was [Federal Reserve Chairman] Alan Greenspan — I don’t know whether he’s talking about the 10-year or what is the closest thing now to the 30-year — we don’t issue 30-years anymore — but the — he referred to it as a conundrum. And after I looked it up, I decided I agreed with him. (Laughter)

I don’t understand it. And — but that’s OK. There’s a lot of things in financial markets I don’t understand. And that doesn’t mean I have to make a decision. I don’t have to either go long or go short, the 10-year. Although by keeping as much money as we do short, we are in effect at least making the decision that we don’t want to be long, long bonds. That doesn’t mean we think it necessarily would be smart to be short them. But we do not want to be long, longer bonds.

If you’d told me two years ago that every move that the Fed would make in the last two years, and you told me all the other variables that would take place, and you’d asked me what the 10-year rate would be at this time, I would have been very wrong. So, you know, it’s not a game I’ve excelled at so far. I’m puzzled by it. And we’ll see where it is next year when we meet. Charlie?

CHARLIE MUNGER: Yeah, I think the one thing you can confidently predict is there won’t be some automatic and rational correlation between inflation and interest rates. There will be weird diversions.

WARREN BUFFETT: Do you want to elaborate on how these weird things will manifest themselves?

CHARLIE MUNGER: No, no. All I know is it happens.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: Frequently very surprising.

WARREN BUFFETT: Well, it surprised us on this so far, didn’t it?

CHARLIE MUNGER: Sure.

WARREN BUFFETT: Yeah.