What is Buffet’s beef with bonds?

Warren Buffet and bonds

Q: Warren Buffett says bonds are dead money, have a bleak future and are a terrible investment idea. What exactly is Buffett’s concern?

A: Earlier this spring, Buffett, who is 90, knocked today’s puny yields on Treasury notes and bonds in the context of his long career, during which a T-bond was as apt to pay more than 6% instead of less than 2%. He asserted that it is silly to commit savings to, say, a ladder of long-term Treasuries on today’s terms and that interest rates overall are likelier to trend up than go back down. But Buffett overlooked other reasons to own bonds and other debt securities, including diversification, tax-free income from municipals and the various ways besides interest-rate movements that bonds can provide worthwhile returns. So, while it makes sense to avoid T-bonds in individual portfolios, it wouldn’t be wise to exit all fixed income, and investors should continue to watch for opportunities.

Q: What is the investing potential in medical real estate investment trusts (REITs) as the economy fully reopens?

A: Medical real estate is a wide category that includes hospitals, medical office buildings, specialized care facilities such as nursing homes and Alzheimer’s residences, and seniors’ luxury living. Health REITs consistently pay a higher dividend yield than property REITs in general, but the shares and earnings are subject to sharper ups and downs because of unpredictable government policies and reimbursements, unemployment (which takes people off insurance), and local economic issues. So far in 2021, the subsector’s average 5% return is below the REIT average, but its one-year bounce of 56% is higher than the average. Two medical REITs, Physicians Realty (symbol DOC) and Medical Properties Trust (MPW), are solid citizens with yields around 5% and consistent dividends.

Q: I have kept my emergency fund in an online savings account, but with the steadily shrinking yield, I am considering shifting half to a bond fund with a maturity of up to five years. Does that make sense?

A: It sounds like a fine idea, whilst yields in the short-to-intermediate range inch upward but bank and money market rates stay anchored at close to zero. Two funds, Northern Ultra-Short Fixed Income (NUSFX) and PGIM Short-Term Corporate Bond (PBSMX), yield 0.8% and 2.0%, respectively, with little principal exposure to rising rates. Exchange-traded fund Vanguard Short-Term Corporate Bond ETF (VCSH), recently yielding 0.8%, also works well.