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.

Interest Rates to Skyrocket This Year!

The Only bright light for the real estate market is about to be smothered. Interest rates will skyrocket this year and next making it that much harder to qualify for mortgages, especially at today's high real estate prices.

The culprit is the US government. It must finance last year's record budget deficit of 1/2 Trillion dollars plus this years record busting deficit of about $2 Trillion, plus the stimulus package and all of the "quantitative easing" of the Federal Reserve, (which again, is as Federal as Federal Express!). And let's not forget the original $700 Billion Wall St Bailout, plus the approximately $2 Trillion additional which will be needed sometime in the next 18 months to bail out the banks again.

You can also expect to see various other multi Billion dollar bailouts; autos, states, pension funds, etc.

These humungus expenditures will be financed by the government saturating the market with Treasury Bonds. As more and more treasuries are issued, their prices will start to fall and when that happens their yield goes in the opposite direction, Up.

Also, 40% of our national debt is held by China and other foreign governments. When the prices of Treasuries and thus their investment in them starts declining, interest rates will have to be raised to incent them to buy more and to hold on to what they already have. Already the Chinese have dumped over 20 Billion in Fannie Mae and Freddie Mac Bonds during the last 5 months of the 2008. They have also halted investment in many American companies. They realize the US is going to flood the market with new Treasury issues and depress the prices.

Not only housing, but all businesses will be adversely affected with the rise in interest rates, including the stock market, which I believe will see Dow 5,000 before the year is out! Possibly as early as the release of the 4th Qtr, 2008 economic data, due out shortly.

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