March 22 (Bloomberg) -- The bond market is saying that it’s safer to lend to Warren Buffett than Barack Obama.
Two-year notes sold by the billionaire’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks, a situation former Lehman Brothers Holdings Inc. chief fixed-income strategist Jack Malvey calls an “exceedingly rare” event in the history of the bond market.
Read this and if you still believe that markets are rational then I've got a bridge to sell you.
Markets are a function of the actors that comprise them. If the belief systems that mold the behavior of those actors is based on myth, fallacy or just plain ignorance, then the market's behavior will mirror that.
In a rational world there is no way in hell that corporate bonds of any kind shoiuld be yielding less than those of a sovereign, currency issuing nation. Yet, that is exactly what we are seeing because the participants believe that the U.S. has too much debt or that it can go bankrupt, when if fact there is absolutely no chance of that.
No matter how financially secure Warren Buffet's firm is, it is infinitely more risky than the U.S. Government because at the end of the day Berkshire Hathaway cannot simply credit bank accounts to meet all payments.
This is a clear indication of an old saying: "Garbage in, garbage out."
Investors believe this garbage about the U.S. going bankrupt and they seem to trust Warren Buffet even more. Were it not for the fact that the idiot rating agencies will soon downgrade U.S. debt (I absolutely believe this), arbitraging Bershire bonds against Treasuries (sell the former, buy the latter) is probably the greatest trade of all time!