Commentary Magazine


Topic: Johnson & Johnson

Whom Do You Trust More?

Last month Berkshire Hathaway sold two-year bonds that yield less than federal notes of the same maturity, according to Bloomberg (h/t: Michael Barone).

That is a truly astonishing fact. The interest the market demands on a bond is determined by 1) the present cost of money, 2) the expected inflation over the life of the bond, and 3) the risk of the bond issuer defaulting. The first two affect every bond equally, so differences in interest rates on similar securities reflect the market’s judgment on the possibility of default.

For a century and more, the securities of the United States Government have been, almost by definition, the safest investment one could make. Even in the depths of the Great Depression no one doubted that the federal government would make good on its debts. Indeed, in the fall of 1932, as the American economy was falling off a cliff, interest rates on treasury bills (the shortest-term federal debt) went negative. Treasury bills are sold at a discount and mature at par rather than pay interest. But in 1932, demand for them pushed the price over par. Investors, in other words, paid for the privilege of investing in the safest possible investments, the short-term paper of the United States.

So the market now has more faith that Warren Buffett (and Proctor and Gamble and Johnson & Johnson too, by the way) will pay off their bonds than that the federal government will do so — just two years down the road.

Thanks, President Obama and Nancy Pelosi. Thanks very much.

Last month Berkshire Hathaway sold two-year bonds that yield less than federal notes of the same maturity, according to Bloomberg (h/t: Michael Barone).

That is a truly astonishing fact. The interest the market demands on a bond is determined by 1) the present cost of money, 2) the expected inflation over the life of the bond, and 3) the risk of the bond issuer defaulting. The first two affect every bond equally, so differences in interest rates on similar securities reflect the market’s judgment on the possibility of default.

For a century and more, the securities of the United States Government have been, almost by definition, the safest investment one could make. Even in the depths of the Great Depression no one doubted that the federal government would make good on its debts. Indeed, in the fall of 1932, as the American economy was falling off a cliff, interest rates on treasury bills (the shortest-term federal debt) went negative. Treasury bills are sold at a discount and mature at par rather than pay interest. But in 1932, demand for them pushed the price over par. Investors, in other words, paid for the privilege of investing in the safest possible investments, the short-term paper of the United States.

So the market now has more faith that Warren Buffett (and Proctor and Gamble and Johnson & Johnson too, by the way) will pay off their bonds than that the federal government will do so — just two years down the road.

Thanks, President Obama and Nancy Pelosi. Thanks very much.

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