The benchmark 10-year US Treasury yield has crossed the crucial 5% mark for the first time since 2023, spooking investors about a possible downturn in stocks as bonds become more attractive. However, investors should remember why Warren Buffett once called bonds a “terrible investment”.
The sharp surge in bond yields came as traders increasingly expect the Federal Reserve to keep interest rates higher for longer, after soaring oil prices revived fears of renewed inflationary pressures. Inflation is already running well above the US central bank’s 2% annual target.
Rising bond yields typically make the debt market more attractive to investors, which often leads to some downturn in the equity market. In this context, investors often remember why Warren Buffett was bearish on bond as a form of long-term investment.
Also read | Bond market shock: 10-year US Treasury yield tops 5% as oil spike puts Federal Reserve on rate-hike path
Why Warren Buffett called bonds a 'terrible' investment
In his 2017 annual letter to Berkshire Hathaway shareholders, Buffett advised investors to ignore the price swings on Wall Street and the temptation to load up on bonds despite soaring yields. He called it a "terrible mistake" for investors with long-term horizons to measure their investment "risk" by their portfolio's ratio of bonds to stocks.
"There is simply no telling how far stocks can fall in a short period," Buffett said. "As an investor's investment horizon lengthens, however, a diversified portfolio of US equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates,” he added.
In his 1979 letter to Berkshire shareholders, Buffett highlighted that he has severe doubts as to whether a very long-term fixed-interest bond, denominated in dollars, remains an appropriate business contract in a world where the value of dollars seems almost certain to shrink by the day.
Then why did Buffett invest in bonds?
However, this does not mean that Buffett advised investors to completely ignore bonds from their portfolios. While the majority of Berkshire’s portfolio consisted of equity bets, he allocated a portion to short-term US bets. He believed that such bond investments ensured liquidity.
Berkshire Hathaway last year doubled its ownership of Treasury bills and owned 5% of all short-term Treasuries, according to a JPMorgan report, cited by CNBC. As of March 2025, the total US Treasury bill market stood at $6.15 trillion, while Buffett’s firm amassed $300.87 billion. This meant that Buffett controlled nearly 1 in every 20 dollars in circulation within the system at that time.
Also read | Warren Buffett once called bonds a terrible investment but later massively invested in them. Here's why
(With inputs from agencies)
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