Buffett eyes Fed bond portfolio

OMAHA, Neb. (AP) — Billionaire Warren Buffett says he doesn't like owning bonds right now, and he doesn't think average investors should either.

Buffett said on CNBC on Monday that bonds are a terrible investment at the moment and owners of long-term bonds may see big losses when interest rates eventually rise.

The head of Berkshire Hathaway Inc. says stocks are generally selling for reasonable prices even with the market at record levels. Several years ago, stocks were very cheap during the recession.

Buffett says bond prices are artificially inflated because the Federal Reserve continues to buy $85 billion of bonds a month.

He says the average investor should keep enough cash to be comfortable and invest the rest in equities.

One of Berkshire Hathaway's major subsidiaries — Gen Re — uses investments in bonds to back reinsurance arrangements protecting writers of long-term care insurance and long-term disability insurance.

Berkshire Hathaway said in a quarterly financial report filed with the U.S. Securities and Exchange Commission that its pre-tax investment income fell 5 percent between the first quarter of 2012 and the first quarter of 2013 because of "a decline in interest earned from fixed maturity securities and cash and cash equivalents."

The company said it is keeping a significant amount of assets in cash and cash equivalents, despite the fact that yields are now close to zero, because it believes that maintaining ample liquidity is paramount.

The Fed's aggressive bond-buying program has helped stimulate the economy, but Buffett said it may be hard for the Fed to safely unload its $3.4 trillion investment portfolio once it decides to change course.

"It's a lot easier to buy things than it is to sell them," Buffett said.

Buffett said it's hard to predict what will happen when the Fed starts unloading bonds, but that it's likely to be "very inflationary."

"We really are in uncharted territory," Buffett said.

See also: