Berkshire Hathaway was a major beneficiary of the sharp increase in short rates from 2022 through early this year but now stands to lose given the drop in short rates now unfolding with the Federal Reserve's half-point cut in a key short rate Wednesday.
Berkshire had the largest holdings of cash and equivalents of any U.S. company at $277 billion at the end of the June, compared with Apple at $153 billion and Alphabet at $101 billion.
The bulk of Berkshire's cash is invested in short-term Treasury bills which have maturities of under a year. Berkshire CEO Warren Buffett is partial to three and six-month T Bills that are auctioned weekly by the Treasury. Berkshire held $234 billion of T-Bills at the end of June.
Berkshire's interest and other investment income was up sharply in the first half of 2024, rising 80% to $4.5 billion before taxes from $2.5 billion in the year-earlier period. That increase reflects higher short rates and larger cash balances as Buffett sold almost $100 billion of stocks, mostly Apple, in the first half of 2024.
Buffett enjoyed the high yields and security of T-bills, which were yielding 5.3% during July. They now yield 4.7% and could be down to 4% at year-end and 3% by the end of 2025 if current market rate expectations pan out.
That likely would lead to lower interest income at Berkshire in 2025 with the magnitude of the decline depending on the level of short rates and the company's T-Bill holdings.
Rising interest income has been a key source of profit growth at Berkshire so far this year while dividend income has declined slightly to $2.7 billion in the first half of 2024, largely due to the halving of the Apple stake to 400 million shares.
Buffett refused to lengthen the maturity of Berkshire's cash investments by investing part in two or three-year Treasuries, which would have mitigated some of the impact of lower short rates.
And he has kept a minimal bond portfolio at Berkshire of just $17 billion, a contrast with most insurers. And much of Berkshire's bond portfolio is cash-like with maturities of less than a year. Buffett apparently has felt that longer-term bonds don't offer enough yield to compensate for the risk. He likes two investments: cash and stocks, with Berkshire holding about $300 billion of equities.
Buffett likes to take no credit or rate risk with Berkshire's cash. He was willing to tolerate near-zero rates in 2020 and 2021, when the company generated virtually no income on its cash, and reaped the benefits in 2023 and most of this year. Now things are set to change.
Other Berkshire businesses stand to benefit from lower rates, including its housing-related business and its big electric utility. That could offer some offset against the impact on its cash investments.