Warren Buffett sees shades of 1980s crisis in today’s bond market

Warren Buffett is warning that the “pathetic” returns available to bond investors may encourage risky behavior.

“Bonds are not the place to be these days,” the legendary investor wrote in Berkshire Hathaway’s annual letter to shareholders, lamenting that the yield on 10-year Treasury bonds has fallen 94% since September 1981.

The big picture: Interest rates have been set below zero by central banks in a handful of countries including Japan, and trillions of dollars have been printed. The idea is that doing so will encourage banks to lend and companies and governments to borrow, spurring recovery from the pandemic.

But that has pushed yields on government bonds to very low levels, wiping out returns for investors such as pension funds and insurers like Berkshire.

The latest: Yields on US government debt have risen sharply in recent weeks, reflecting expectations among investors that a robust economic recovery will take hold in the United States thanks to vaccinations and stimulus measures.

But yields are still low by historical standards, and what happens next with the bond market is very much up for debate. In his letter, Buffett leans on decades of experience to point out that low yields also come with plenty of risk.

“Some insurers, as well as other bond investors, may try to juice the pathetic returns now available by shifting their purchases to obligations backed by shaky borrowers,” said Buffett.

“Risky loans, however, are not the answer to inadequate interest rates. Three decades ago, the once-mighty savings and loan industry destroyed itself, partly by ignoring that maxim,” he added.

History lesson: The Savings and Loan Crisis, which kept US regulators busy for most of the 1980s, kicked off when inflation and interest rates both rose dramatically, wiping out thousands of the small mortgage lenders.

The Oracle of Omaha doesn’t offer a policy prescription in his annual letter. But he does suggest that he thinks low yields are here to stay for some time, despite the recent rise.

“Fixed-income investors worldwide — whether pension funds, insurance companies or retirees — face a bleak future,” he wrote.

Not everyone agrees: Some investors are worried that prices may spike later this year when the coronavirus recovery takes hold in the United States, pushing the Fed to hike interest rates sooner than expected.

But there are still two reasons why the Fed is unlikely to hike rates anytime soon, according to Neil Shearing of Capital Economics.

The first is a switch by the central bank to target average inflation of 2% over time, allowing for more flexibility. The second is that the Fed has a dual mandate to pursue full employment as well as price stability.

For more on Buffett’s letter, including a rare “mistake,” read our full report from Paul R. La Monica.

Wall Street is kicking out yet another big Chinese company 

A major Chinese oil company that has traded on Wall Street for decades has become the latest casualty of tensions between Washington and Beijing.

The New York Stock Exchange announced Friday that it will delist CNOOC, China’s third largest oil company and its largest offshore oil producer. Shares in the firm will stop trading from March 9, reports my colleague Laura He.

The exchange said it was aiming to comply with an order former President Donald Trump signed in November, which bans Americans from investing in firms that the US government suspects are either owned or controlled by the Chinese military.

It’s the fourth Chinese company to be slapped with such a punishment. The exchange said in January that it would end trading of shares in China Mobile, China Telecom and China Unicom to comply with Trump’s order. They have since ceased trading.

CNOOC has traded in New York since 2001. It said Sunday that it “regrets” the NYSE decision, and warned in a filing to the Hong Kong Stock Exchange that the delisting may affect share prices and volumes. It added that it would “closely monitor” any developments.

2021 could be a big year for labor unions

Rarely has the chasm between rank-and-file-workers and the extremely wealthy been this wide. While millions of people have lost jobs, gone hungry and struggled to pay for their basic needs, billionaires’ wealth soared to new heights in 2020.

But now: In cities across the United States, and inside the walls of some of the world’s largest enterprises, there is a swelling of union organizing activity that has been propelled by the pandemic and the recession.

Frontline workers protested for workplace protections and paid sick leave. In Big Tech, trailblazing unionization efforts are accelerating at Amazon and Google. President Joe Biden has pledged to be “the most pro-union president you’d ever seen.”

Add it all up, and there could be major advances for labor unions in 2021. My colleague Alicia Wallace explores what’s next in her feature story.

Up next

NIO, Novavax and Zoom Video are scheduled to report earnings after US markets close.

Also today:

• ISM Manufacturing Index for February is released at 10:00 a.m. ET.