Buffet Expects Bond Bubble to Burst!

NEW YORK (Reuters) - Warren Buffett, whose Berkshire Hathaway Inc sits on $25.54 billion of cash, said worried investors are making a costly mistake by buying up U.S. Treasuries that yield almost nothing.

In his widely read annual letter to Berkshire shareholders, the man many consider the world's most revered investor said investors are engulfed by a "paralyzing fear" stemming from the credit crisis and falling housing and stock prices. Treasury prices have benefited as investors flocked to the perceived safety of the "triple-A" rated debt.

But Buffett said that with the U.S. Federal Reserve and Treasury Department going "all in" to jump-start an economy shrinking at the fastest pace since 1982, "once-unthinkable dosages" of stimulus will likely spur an "onslaught" of inflation, an enemy of fixed-income investors."

Note: As investors jump into Treasuries, their prices rise, pushing yields down, as they go in opposite directions.

The yield on these bonds is practically zero and Warren reports.

What he and others foresee is that as Trillions of bonds issued by the government and the Fed as bailout funds, loans etc. their prices will fall dramatically as the supply far outstrips the demand for them.

As the prices fall, not only will current investors, who bought at Bubble levels, take huge losses, the interest rates on these bonds will soar, driving the cost of money for mortgages and other financial instruments whose rates are tied to bond up dramatically. This will be a huge blow to the already comatose real estate market and will be a substantial drag on commerce in general as the cost of their funds go up.