Opposing Sides on Treasuries: Warren Buffet vs. Bill Gross

In a difference of opinion regarding Treasuries, Pacific Investment Management Co.’s (PIMCO) Bill Gross showed his support of  them by recently upping his holdings while billionaire and widely-watched market guru Warren Buffett took a different viewpoint. He sees them as “dangerous.”

Last month, Gross increased the firm’s assets with U.S. government and Treasury debt to 38 percent in the firm’s $250.5 billion Total Return Fund, aka the world’s biggest bond fund, according to Bloomberg. With the position change, it rose 30 percent from December, noted the firm’s website.

So why the big investment?

Gross attempted to explain his actions in a February 3 radio interview with Tom Keene and Ken Prewitt on the show “Bloomberg Surveillance.” He said that PIMCO had purchased the Treasuries with five, six and seven maturities in response to the January 25 Federal Reserve’s commitment to have short-term rates either remain low or pretty much at zero until the end of 2014.

Gross added that with the Fed is “not really afraid of higher inflation,” and that 10- and 30-year Treasuries are not attractive.

To place an “inflation bet,” he said that PIMCO’s Total Return Fund (PTTRX) has about 8 percent of its holdings in Treasury Inflation Protected Securities.

Buffet Sees Danger with the Investment

In his opposing view, Buffet has said that taxes and inflation should deter investors away from debt. In his annual shareholder letter this week, he said of government and treasury debt, such as PIMCO’s recent investments, “They are among the most dangerous of assets. Over the past century, these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal.”

According to Bloomberg, U.S. 10-year yields dropped four basis points (0.04 percentage point), to 1.99 percent on Friday. Back in September, it saw a record-low 1.67 percent. In addition, differences between 10-year rates and annual consumer cost increases, called the real yield, came in at a negative 1.01 percent. This is considerably lower than October’s negative 2.14 percent in October–a high last seen in 1980.

Buffet noted in his annual letter that “bonds should come with a warning label” but Berkshire Hathaway (NYSE:BRKA) has “significant amounts” of debt such as short-term securities. He further explained, “At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be. We primarily hold U.S. Treasury bills, the only investment that can be counted on for liquidity under the most chaotic of economic conditions.”