As of the end of June, Berkshire Hathaway held $277 billion in cash and cash equivalents, most of which were invested in high-yield government bonds.

Berkshire Hathaway A gained significant benefits during the period of sharp rise in short-term interest rates from 2022 to the beginning of this year, but now the company is facing losses as the Federal Reserve cut key short-term interest rates by half a percentage point on Wednesday.

As of the end of June, Berkshire Hathaway had the highest cash and cash equivalents among US companies, reaching $277 billion, while Apple had $153 billion and Alphabet had $101 billion.

Berkshire's cash is primarily invested in short-term government bonds with a maturity of less than one year. Berkshire CEO Warren Buffett prefers weekly auctioned three-month and six-month government bonds. As of the end of June, Berkshire held $234 billion in government bonds.

In the first half of 2024, Berkshire Hathaway's interest and other investment income increased significantly, with pretax income of $4.5 billion, an 80% increase from the same period last year. This growth reflects higher short-term interest rates and a larger cash balance, as Buffett sold nearly $100 billion of stocks in the first half of 2024, most of which were Apple shares.

In July, the yield of government bonds was 5.3%. The current yield is 4.7%. If market rate expectations come true, it may drop to 4% by the end of the year and to 3% by the end of 2025.

This could lead to a decrease in Berkshire Hathaway's interest income in 2025, the extent of which will depend on the level of short-term interest rates and the amount of government bonds held by the company.

So far, interest income is an important source of profit growth for Berkshire this year, while dividend income has slightly decreased. In the first half of 2024, it was 2.7 billion US dollars, mainly due to Apple's shares halving to 0.4 billion shares.

Buffett refused to extend the maturity of Berkshire's cash investments by investing some of the cash in two or three-year bonds, which could have mitigated the impact of the short-term interest rate reduction.

At the same time, Berkshire's bond investment portfolio is only 17 billion US dollars, which is in sharp contrast to most insurance companies. Berkshire's bond portfolio is mostly cash-like assets with a maturity of less than one year. Buffett obviously believes that the yield on long-term bonds is not enough to compensate for the risks. He prefers two types of investments: cash and stocks. Berkshire holds about 300 billion US dollars in stocks.

Buffett does not want to take any credit or interest rate risk in Berkshire's cash investments. In 2020 and 2021, when the company had almost no cash income, he was willing to tolerate near-zero interest rates, and in 2023 and most of this year, he reaped the returns. Now, the situation will change.

Other Berkshire businesses may benefit from the lower interest rates, including its housing-related business and large electrical utilities. This may partly offset the impact on its cash investments.

Editor/Lambor