Are Bonds Dangerous?

In an adaptation of his upcoming annual letter to shareholders, billionaire Warren Buffett called bonds "among the most dangerous of assets", and stated that they "should come with a warning label."

Bonds hold several types of risk, but the one that Buffett highlighted is purchasing power risk. In other words, inflation can erode a big chunk of the returns in these assets over time. And current bond rates do not come close to compensating investors for the purchasing power risk that they assume.

And this comes in the same week as BlackRock CEO Larry Fink stating that investors should be 100% in equities because of valuations and the Fed's pledge to keep interest rates low.

Of course, last year PIMCO bond king Bill Gross pounded the table over the paltry returns on Treasuries, even going so far as to short them in his flagship fund. But rates only continued to go lower (meaning prices went higher) amid recession fears and the European sovereign debt crisis.

Where Would You Invest?

Would you rather invest in a government bond that yields a fixed 2.0% for 10 years or a blue chip stock like McDonald's (MCD) that pays a dividend currently yielding 2.8%, and who has increased their dividend at a compound annual rate of 18% over the last 20 years?

Do you believe that current bonds rates adequately compensate investors for inflation risk?

Read the full analyst report on MCD