As of the end of June, Berkshire Hathaway held $277 billion in cash and cash equivalents, most of which was invested in high-yield Treasury bonds.
Berkshire Hathaway A (BRK.A.N) benefited greatly from the sharp rise in short-term interest rates from 2022 to the beginning of this year, but now the company faces losses as the Federal Reserve cut its key short-term rate by half a percentage point on Wednesday.
Berkshire had the most cash and equivalents among U.S. companies at $277 billion at the end of June, compared with $153 billion for Apple (AAPL.O) and $101 billion for Alphabet (GOOGL.O).
Berkshire's cash is invested primarily in short-term Treasury bills with maturities of less than a year. Berkshire CEO Warren Buffett prefers three-month and six-month Treasury bills that are auctioned weekly. At the end of June, Berkshire held $234 billion in Treasury bills.
Berkshire's interest and other investment income surged in the first half of 2024, to $4.5 billion before taxes, up 80% from $2.5 billion in the same period last year. The increase reflects higher short-term interest rates and a larger cash balance as Buffett sold nearly $100 billion of stock in the first half of 2024, mostly Apple shares.
In July, the yield on Treasury bonds was 5.3%. The current yield is 4.7%, and if market interest rate expectations come true, it may fall to 4% by the end of the year and 3% by the end of 2025.
That could result in Berkshire's interest income being reduced in 2025, with the extent of the decline depending on the level of short-term interest rates and the amount of Treasury securities the company holds.
Interest income has been a significant source of Berkshire's profit growth so far this year, while dividend income has fallen slightly, to $2.7 billion in the first half of 2024, largely due to the halving of its Apple stake to 400 million shares.
Buffett has refused to extend the maturity of Berkshire's cash investments by investing some of it in two- or three-year Treasury bonds, which would have mitigated the impact of lower short-term interest rates.
Meanwhile, Berkshire's bond portfolio is just $17 billion, in stark contrast to most insurance companies. Berkshire's bond portfolio is mostly cash-like assets with maturities of less than one year. Buffett apparently believes that the yields on long-term bonds are not enough to compensate for the risk. He prefers two investments: cash and stocks, and Berkshire holds about $300 billion in stocks.
Buffett doesn't want to take any credit or interest rate risk on Berkshire's cash investments. He was willing to tolerate near-zero interest rates in 2020 and 2021, when the company had almost no cash coming in, and reaped the rewards in 2023 and most of this year. Now, that's about to change.
Other Berkshire businesses could benefit from lower interest rates, including its housing-related businesses and large electric utilities. That could offset some of the impact on its cash investments.
Article forwarded from: Jinshi Data
