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Buffett Might Be Sending A Signal To Traders About The Bond Market

Buffett Might Be Sending A Signal To Traders About The Bond Market

Is Warren Buffett making a new prediction about the direction interest rates are heading in with his new deal?

Berkshire Hathaway (NYSE: BRK.A, BRK.B) Finance Corp. is now issuing 30-year fixed-rate bonds to refinance $950 million of floating-rate senior notes that are maturing at the end of next week.

But the switch from floating to fixed-rate is what’s piquing curiosity as it seems to be a bet on where interest rates might be heading, though it may also be indicative that the company sees the sharp decline in long-term yields over the last couple of months just too good to pass up.

If Buffett expects that interest rates won’t get much lower from where they are, it would make sense for Berkshire to lock in a low interest rate now rather than face higher payments in the future.

Yesterday, the 30-year U.S. yield sank to 2.91%, the lowest level since this time last year, and the recent bond rally would equate to a savings in the neighborhood of millions of dollars per year in its switch from floating to fixed.

The Berkshire unit issued 30-year bonds in August 2018 to refinance a portion of their floating-rate notes. However, prior to that, they hadn’t issued debt with that long of a maturity since May of 2013.

Berkshire is expected to price the debt on Thursday and it’s anticipated they will price it with a spread of between 150 and 155 basis points above Treasuries. The company has the third-highest credit rating from both Moody’s and S&P Global Ratings. 

Given this, Berkshire certainly has plenty of options, from shorter maturity to sticking with floating-rate debt. That it’s choosing to issue 30-year fixed-rate bonds is definitely something traders should consider when thinking about where rates and credit spreads could be heading this year and beyond.

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