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How Berkshire Hathaway Benefits From Fed Rate Hikes

By David KassStock MarketsMar 16, 2017 01:20AM ET
www.investing.com/analysis/how-berkshire-hathaway-benefits-from-fed-rate-hikes-200179083?preview_fp_admin_1234=this_is_1234
How Berkshire Hathaway Benefits From Fed Rate Hikes
By David Kass   |  Mar 16, 2017 01:20AM ET
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I am expecting a slow, gradual increase in interest rates over the next two years. After the Federal Reserve raised short term rates (Federal Funds rate) by 1/4% today, and I believe they will again three more times later this year, then interest rates will be 1% higher a year from now. Federal Funds were at 1/2 – 3/4% (near historically low levels) before today’s rate increase. Since Berkshire currently has about $85 billion in cash invested primarily in short term Treasuries, a 1% increase in short term interest rates results in an additional income of $850 million per year for Berkshire. Furthermore, Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC), two of Berkshire’s largest equity investments, will benefit from an increase in earnings as interest rates rise. Their corresponding share prices should then also increase.

In a meeting with University of Maryland students on November 18, 2016, Warren Buffett said: “Stocks are cheap if long term rates are at 4%, four to five years from now.” Currently, the 10-Year Treasury is yielding only 2.50%. In today’s environment, both Berkshire’s businesses (81% of assets) and its equity portfolio (19% of assets) should continue to do fine if interest rates rise gradually as most economists, including myself, are expecting.

How Berkshire Hathaway Benefits From Fed Rate Hikes
 

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How Berkshire Hathaway Benefits From Fed Rate Hikes

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