The yield on US 10-year Treasury bonds has rapidly dropped to around 4.13%, indicating that bond investors who bought at a low price have earned significant capital gains. Recent economic data in the US has shown a weakening trend, which seems to support the market’s expectation that the Federal Reserve may choose to lower interest rates next year.
The Federal Reserve has paused interest rate hikes in both September and November, causing the yield on 10-year Treasury bonds to briefly surpass 5% in late October, reaching a new high since 2007. This sharp increase in yield has led to a significant decline in bond prices.
The drop in yield to around 4.13% means that bond prices have risen due to the decrease in yield, allowing bond investors who bought at a low price to earn substantial capital gains from bond trading.
It is worth noting that the Federal Reserve’s previous statement about not raising interest rates in November was because the bond market had already accomplished the related work for them. However, now that the yield has peaked and started to decline, the market is examining the Federal Reserve’s previous statements. Logically, the decrease in bond yield may also mean that it has “done some work” for the Federal Reserve, and the market may move towards the predicted cycle of interest rate cuts.
Recent economic data in the US has shown a weakening trend, indicating a sustained decline in inflation, which aligns with the Federal Reserve’s expectations after raising interest rates. Although Federal Reserve Chairman Powell stated last week that it is still too early to declare victory over inflation, the market still predicts that the US economy will slow down by 2024, possibly even entering a recession. Therefore, the market is more inclined to believe that the Federal Reserve will not further raise interest rates and may even choose to lower them next year.
In recent reports, it was revealed that Berkshire Hathaway has been heavily investing in short-term US Treasury bonds, continuously reinvesting its past profits. According to the company’s third-quarter financial report, this strategy has significantly increased its cash reserves to approximately $157.2 billion, an increase of nearly $10 billion from the previous quarter. This substantial cash reserve provides ample ammunition for the company’s future investments.
In the backdrop of rising interest rates in recent years, the bond market has continued to attract a large amount of capital, and Berkshire Hathaway has become one of the beneficiaries. However, Berkshire Hathaway’s gains are not just from the price difference. With the yield on Treasury bonds previously rising to 5%, the company’s insurance investment interest income reached $1.7 billion in the third quarter, resulting in a total income of $5.1 billion in the past year, surpassing the interest income earned solely from cash reserves over the past three years.
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US 10-year Treasury bond yield