Yesterday, Bloomberg reported that “Berkshire Hathaway Finance Corp.(1) is issuing 30-year fixed-rate bonds to refinance $950 million of floating-rate senior notes that mature at the end of next week.” While the numbers hardly move the needle for Warren Buffett and Berkshire Hathaway (BRK-B), the move is getting a lot of attention since it’s associated with Warren Buffett, arguably the best investor of all times.
So, why exactly is this bond issuance important? Basically, it’s important for three reasons. First, Berkshire is issuing a long-term note to refinance a short-term maturing debt. Second, the company is issuing a fixed rate debt to refinance a floating rate debt. Finally, the issuance has received even more scrutiny at a time when there is uncertainty over the future rate outlook. While the Fed raised rates four times last year, the market is divided over the rate hike outlook for this year. Some market observers expect the Fed to continue its tightening cycle this year. Then, there is a section of the market (SPY) that believes that the Fed might be done with its rate hikes, as the US economy is expected to slow down this year and inflation pressures should also ease after the crash in commodities.
Finally, some observers even expect the Fed to start cutting rates to prevent any further slowdown in the US economy (JPM) (WFC). To be sure, demand from interest-rate-sensitive goods like housing and automotive already seems to be taking a hit from rising rates.
Over the last few weeks, Warren Buffett has been in the limelight for his investments in Apple (AAPL). The stock has witnessed a selling spree, which was further aggravated by lower guidance.
But are markets reading too much into Berkshire’s bond issuance? We’ll explore this aspect in the next article.