Warren Buffett said this morning that the Federal Reserve's efforts to stimulate the economy have contributed to its gradual improvement, but low interest rates make bonds "terrible investments," Reuters reported.
Speaking on CNBC television, Buffett said the economy is benefiting from improvement in areas that had not previously performed well, particularly home building. And low benchmark interest rates, including overnight rates that have been effectively zero since late 2008, can help stimulate demand.
However, many investors have also been drawn to bonds because their prices rise as rates fall, and Buffett said they could get their comeuppance when that process reverses.
"Bonds, they're terrible investments now," Buffett said. "That will change at some point, and when it changes, people could lose a lot of money if they're in long-term bonds."
Jim McCaughan, CEO of Principal Global Investors, said in an interview Friday with Bloomberg that Treasury investments are "vulnerable in a longer-term view, maybe one year out," noting that 10-year Treasury bonds are currently at 1.7 percent.
"I would say on my most-likely economic scenario that they're headed for maybe as high as 3 percent on a two-year view," McCaughan said. "That doesn't sound like a lot, but it is a lot. That for a 10-year portfolio is something approaching a 15 percent draw-down, at a time when equities are doing quite well."
Bond investors are gaining confidence that Federal Reserve Chairman Ben Bernanke will unwind the central bank's unprecedented $3.3 trillion balance sheet without sparking a crash similar to 1994, when Alan Greenspan surprised the market by doubling benchmark lending rates in 12 months, Bloomberg reported.
Policymakers' forecasts of no rise in the target interest rate for overnight loans between banks until 2015 are damping yields in a market dominated by the Fed's $1.84 trillion, or 15.4 percent of the $11.94 trillion in marketable U.S. debt. Fed officials also maintained last week that they plan to hold the interest rate around zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn't exceed 2.5 percent.