Fairfax 2025

[djokovic1]

I am surprised and a little disappointed they have taken down duration. The US 5 & 10 year is close to 20 year highs and the absolute interest rate levels generate very healthy ROE's for them given the 3:1 leverage. My intuition is it's still a good time to keep extending the duration at these absolute interest rate levels.

[Hoodlum]

5 hours ago, djokovic1 said:

I am surprised and a little disappointed they have taken down duration. The US 5 & 10 year is close to 20 year highs and the absolute interest rate levels generate very healthy ROE's for them given the 3:1 leverage. My intuition is it's still a good time to keep extending the duration at these absolute interest rate levels.

This is where I will leave it to Brian Bradstreet and his bond team to determine when to sell or lock in long bonds.  They may even exit the 5 and 10 year treasuries at some point, and I would be fine with that as they likely see a better opportunity.  
 

But it will be interesting to see if further changes to the bond duration mix occurs during Q3.  That could be a leading indicator as to where Fairfax see the opportunities in 2026.  Berkshire had already exited all of their long bonds, so Fairfax would not be on an island if they did the same. 

[Santayana]

in Bradstreet we trust!

 

[Txvestor]

10 hours ago, djokovic1 said:

I am surprised and a little disappointed they have taken down duration. The US 5 & 10 year is close to 20 year highs and the absolute interest rate levels generate very healthy ROE's for them given the 3:1 leverage. My intuition is it's still a good time to keep extending the duration at these absolute interest rate levels.

I agree with this. Prem even touted this in one of his last Q calls. Particularly with who's in the whitehouse and the aggressive push to lower rates, and the regulatory requirements around investments, I think this was a head scratcher for me. 

[Santayana]

15 minutes ago, Txvestor said:

I agree with this. Prem even touted this in one of his last Q calls. Particularly with who's in the whitehouse and the aggressive push to lower rates, and the regulatory requirements around investments, I think this was a head scratcher for me. 

Prem didn't say they'd keep the duration forever, and the reduction in duration kind of matches up with how much time has passed since they first extended.   Unless you really think we're going to return to sub 2% yields on the 10 year, which I think is unlikely regardless of what the Fed does, there's really not much reason to be concerned about this.  OTOH if long yields spike, we'll be very happy to not be so exposed.

[Hsmpanl]

24 minutes ago, Santayana said:

Prem didn't say they'd keep the duration forever, and the reduction in duration kind of matches up with how much time has passed since they first extended.   Unless you really think we're going to return to sub 2% yields on the 10 year, which I think is unlikely regardless of what the Fed does, there's really not much reason to be concerned about this.  OTOH if long yields spike, we'll be very happy to not be so exposed.

Agree with this, and I think appropriate that Prem, Bradsheet and co are being appropriately defensive about the potential for long term rate increases.

[Viking]

1 hour ago, Txvestor said:

I agree with this. Prem even touted this in one of his last Q calls. Particularly with who's in the whitehouse and the aggressive push to lower rates, and the regulatory requirements around investments, I think this was a head scratcher for me. 

 

@Txvestor , my guess is Fairfax's decision to sell $1.1 billion in treasuries with maturities of 28 to 30 years in Q2 has little to do with where the Fed funds rate (very short term rates) might go in the next couple of months/year. 

 

Here is what we know:

• Trump is going to stack the Fed with a bunch of yes-men/women. The big move will be replacing Powell. When that happens, the Fed Funds rate will be coming down, likely fast and by a lot. How will financial markets respond? No idea. 
• Trump is going to implement tariffs on all trading partners - the MINIMUM rate will likely be 15%. This is a slow moving process... it will take another 6 to 12 months to start to understand what this might do to inflation/the economy etc.  
• The BBB locks in (and likely grows) massive deficit spending at the Federal level. Deficit spending usually juices the economy.

It looks to me like the risks of higher inflation are going up. Note, I am thinking 'moderately' higher... not spiking.

 

But here is the kicker. To state the obvious, Trump is a non-traditional thinker. How 'safe' are US treasuries today? The short answer is they aren't. Trump will not hesitate to run roughshod over Treasury bond holders if it furthers his aims. Long duration Treasuries are the most risky in this context.

 

My question is why would anyone want to hold Treasuries with maturities from 28 to 30 years today? Especially if they don't have to (like Fairfax). As I said in my Q2 earnings recap, I don't think long duration Treasury holders are getting adequately compensated for the risks. 

 

Note, I am not 'pessimistic' in saying this. We could get a melt up in asset prices (and moderately higher inflation). The big move in gold over the past year might be telling us something important (or not). 

 

Bottom line, Bradstreet and the fixed income team at Fairfax have a brilliant 40 years track record. And their strength is navigating the exact environment we are in today. They know more in their pinkie finger than I will ever know in my lifetime about trying to invest in Treasuries and the fixed income market. I agree with @Santayana 'In Bradstreet (and team) we trust.'

Edited August 4, 2025 by Viking

[cwericb]

35 minutes ago, Viking said:

 

@Txvestor , my guess is Fairfax's decision to sell $1.1 billion in treasuries with maturities of 28 to 30 years in Q2 has little to do with where the Fed funds rate (very short term rates) might go in the next couple of months/year. 

 

Here is what we know:

• Trump is going to stack the Fed with a bunch of yes-men/women. The big move will be replacing Powell. When that happens, the Fed Funds rate will be coming down, likely fast and by a lot.

 

"Trump is going to stack the Fed with a bunch of yes-men/women. The big move will be replacing Powell. When that happens, the Fed Funds rate will be coming down, likely fast and by a lot. "

............................................................................................................................................

Yeah, I heard rates could be coming down by up to 1400% !!

 

Sorry, heard so much bullshit from you know who, I'm expecting a pronouncement to the effect any minute. My sarcastic inner self is hard to hold back these days....

Edited August 4, 2025 by cwericb

[TwoCitiesCapital]

12 hours ago, djokovic1 said:

I am surprised and a little disappointed they have taken down duration. The US 5 & 10 year is close to 20 year highs and the absolute interest rate levels generate very healthy ROE's for them given the 3:1 leverage. My intuition is it's still a good time to keep extending the duration at these absolute interest rate levels.

 

I'm a little disappointed too. That being said, that was as of June 30th. Always possible the "trade" is put back on now that the last three months of labor data is screaming. 

 

1 hour ago, Viking said:

 

@Txvestor , my guess is Fairfax's decision to sell $1.1 billion in treasuries with maturities of 28 to 30 years in Q2 has little to do with where the Fed funds rate (very short term rates) might go in the next couple of months/year. 

 

Here is what we know:

• Trump is going to stack the Fed with a bunch of yes-men/women. The big move will be replacing Powell. When that happens, the Fed Funds rate will be coming down, likely fast and by a lot. How will financial markets respond? No idea. 

 

My only guess is that they expect long rates to rise as the front end comes down - which would be consistent with the last cut. 

 

But the last cut occurred before labor market deterioration, so I am skeptical it happens again. That's really the only reason I can see for them reducing it now. 

 

29 minutes ago, cwericb said:

"Trump is going to stack the Fed with a bunch of yes-men/women. The big move will be replacing Powell. When that happens, the Fed Funds rate will be coming down, likely fast and by a lot. "

............................................................................................................................................

Yeah, I heard rates could be coming down by up to 1400% !!

 

Sorry, heard so much bullshit from you know who, I'm expecting a pronouncement to the effect any minute. My sarcastic inner self is hard to hold back these days....

 

Trump replacing Fed chairs with 'yes' men would absolutely be a reason for long rates to rise. 

[Hoodlum]

1 hour ago, Viking said:

 

@Txvestor , my guess is Fairfax's decision to sell $1.1 billion in treasuries with maturities of 28 to 30 years in Q2 has little to do with where the Fed funds rate (very short term rates) might go in the next couple of months/year. 

 

Here is what we know:

• Trump is going to stack the Fed with a bunch of yes-men/women. The big move will be replacing Powell. When that happens, the Fed Funds rate will be coming down, likely fast and by a lot. How will financial markets respond? No idea. 
• Trump is going to implement tariffs on all trading partners - the MINIMUM rate will likely be 15%. This is a slow moving process... it will take another 6 to 12 months to start to understand what this might do to inflation/the economy etc.  
• The BBB locks in (and likely grows) massive deficit spending at the Federal level. Deficit spending usually juices the economy.

It looks to me like the risks of higher inflation are going up. Note, I am thinking 'moderately' higher... not spiking.

 

But here is the kicker. To state the obvious, Trump is a non-traditional thinker. How 'safe' are US treasuries today? The short answer is they aren't. Trump will not hesitate to run roughshod over Treasury bond holders if it furthers his aims. Long duration Treasuries are the most risky in this context.

 

My question is why would anyone want to hold Treasuries with maturities from 28 to 30 years today? Especially if they don't have to (like Fairfax). As I said in my Q2 earnings recap, I don't think long duration Treasury holders are getting adequately compensated for the risks. 

 

Note, I am not 'pessimistic' in saying this. We could get a melt up in asset prices (and moderately higher inflation). The big move in gold over the past year might be telling us something important (or not). 

 

Bottom line, Bradstreet and the fixed income team at Fairfax have a brilliant 40 years track record. And their strength is navigating the exact environment we are in today. They know more in their pinkie finger than I will ever know in my lifetime about trying to invest in Treasuries and the fixed income market. I agree with @Santayana 'In Bradstreet (and team) we trust.'

I don’t think replacing Powell will change rates as much as we think in the medium term.  If the bond market thinks inflation will take hold then long term bond yields will increase, which increases the cost of renewing long term US debt.  Th US government has tried to avoid this, which is why they pulled back on the suggestion of replacing Powell now.  
 

But we will see more volatility in the bond market as the new Fed tries to drop rates quickly and then need to pull that back quickly after the bond market responds. We can forget about the normal schedule for rate adjustments as the government will do this through trial and error.  The US government will soon realize that their trillions in debt along with their tariffs will limit what they can do. 

[Hoodlum]

We are in an interesting period of economic Tug of War between a slowing economy and inflation, which we haven’t experienced in decades and is unknown territory for most investors.  
 

Neither one had taken hold yet, but it looks like Fairfax is preparing for either scenario.  If inflation takes hold then long treasury yields will increase. If the economy tanks then there will be opportunities for higher corporate bond yields.  Both Berkshire and Fairfax seem to think we are close to the point where one or both will gather steam. 

[nwoodman]

It’s my understanding that even if Trump replaces Powell, he can’t immediately force the Fed to cut rates. 

 

Powell’s term runs to May 2026, and even then, Trump can only nominate a successor, Senate confirmation isn’t instant (even if our friends in congress are captured).
 

More importantly, he can’t remove or replace the Fed’s regional presidents, who hold 5 of the 12 FOMC votes. The other Governors are presidential appointees but can only be replaced by yes men as the seats become vacant.

 

So while Trump can pretend,  he can’t actually snap his fingers and cut rates.  What he can do is spook the bond market, especially the long end. If markets fear politicised rate policy or fiscal largesse, yields might jump despite the rhetoric.

 

Having listened to Bradstreet at the dinner and watching him over the year's I am extremely comfortable with the moves he makes.  It’s the one aspect of Fairfax that I don’t worry about.

[Viking]

1 hour ago, nwoodman said:

It’s the one aspect of Fairfax that I don’t worry about.

@nwoodman +1

[Txvestor]

7 hours ago, cwericb said:

 

"Trump is going to stack the Fed with a bunch of yes-men/women. The big move will be replacing Powell. When that happens, the Fed Funds rate will be coming down, likely fast and by a lot. "

............................................................................................................................................

Yeah, I heard rates could be coming down by up to 1400% !!

 

Sorry, heard so much bullshit from you know who, I'm expecting a pronouncement to the effect any minute. My sarcastic inner self is hard to hold back these days....

The problem here is there's no guarantee that the Fed won't go loco and start a whole new Quantitative easing program. One thing they have done this tightening cycle is brought down their balance sheet. That doesn't quite get the attention it deserves. It's down from a peak over $9T to $6.6T. If the easy money president pushes them to reduce long term rates by buying long dated treasuries then rates will come down. My point is since 2008, nothing is predictable or done with transitional models in mind. Hence while rates were high even if they cut 30yr holdings I would have been happier if they extended the duration to close 4yrs. 

[Hoodlum]

5 hours ago, Txvestor said:

The problem here is there's no guarantee that the Fed won't go loco and start a whole new Quantitative easing program. One thing they have done this tightening cycle is brought down their balance sheet. That doesn't quite get the attention it deserves. It's down from a peak over $9T to $6.6T. If the easy money president pushes them to reduce long term rates by buying long dated treasuries then rates will come down. My point is since 2008, nothing is predictable or done with transitional models in mind. Hence while rates were high even if they cut 30yr holdings I would have been happier if they extended the duration to close 4yrs. 

 

QE did eventually helped push up inflation towards the end of Covid, but QE did work ok for a short period during a low inflation environment but now we have higher inflation and tariffs will pressure that even further.   Trying to implement QE now, will drive up inflation quicker and much higher than before. The market will not act kindly to another round of QE. 

[djokovic1]

6 hours ago, Txvestor said:

The problem here is there's no guarantee that the Fed won't go loco and start a whole new Quantitative easing program. One thing they have done this tightening cycle is brought down their balance sheet. That doesn't quite get the attention it deserves. It's down from a peak over $9T to $6.6T. If the easy money president pushes them to reduce long term rates by buying long dated treasuries then rates will come down. My point is since 2008, nothing is predictable or done with transitional models in mind. Hence while rates were high even if they cut 30yr holdings I would have been happier if they extended the duration to close 4yrs. 

Yes this is where I am coming from too. Extending duration at these interest rates, i.e locking in a (5%*3) 15% ROE through fixed income seems like a good risk reward to me. I concur with others that I don't mind the sell down of the 30 year as if rates rise those bonds will get affected the most. 

I guess we will see the direction of travel in Q3. Maybe a question for the next conference call, to understand how they think about this.

Edited August 5, 2025 by djokovic1

[gfp]

I think you guys are wrong about QE and QT.  They do almost nothing and often times have at least as much effect in the opposite direction of their intended outcome.  One thing QE accomplished was tightening mortgage spreads to their treasury benchmark but I think most of that effect was the effective duration of a 30 year mortgage plummeting during an extended refinancing boom and the appropriate treasury benchmark moving closer to the 2 year bond than the 10 year.

 

QE removes useful treasury securities from the private sector and replaces them with bank reserves, a neutered form of token that only the largest Fed member banks can use.  Since lending by the largest banks is not in any way constrained by the level of bank reserves in the system (lending is constrained by demand for loans / balance sheet / regulation / risk adjusted capital requirements), excess bank reserves parked at the fed is not the same as the "cash" most people imagine QE raining down on the economy.

 

A treasury security is the bedrock collateral of the world financial system and can be leveraged, pledged, transformed, swapped, repo'd - it is useful collateral to the private sector.

 

A bank reserve is next to useless unless the level of reserves in the system is too low (it's huge relative to history).

 

At the time they were big on QE, the treasury coupon securities they were removing from the private sector paid interest and the bank reserves paid nothing or next to nothing - removing interest income from the private sector.  That is why the Fed's balance sheet was earning a big "profit" during those years - remitting those profits to the treasury.  That is the same as a tax - interest income that would have been earned by the private sector is earned by the Fed instead and remitted to the treasury to help reduce the deficit.  Tax.  (opposite of stimulus)

 

Presently, the excess reserves pay a higher rate than the treasury coupon securities on their books so the Fed's balance sheet is producing losses.  This is stimulus.  When the Fed pays more net interest into the private sector than it earns it is additive to the fiscal stimulus.

Edited August 5, 2025 by gfp

[cwericb]

When it comes to this sort of stuff, like a couple of others here, I simply let Mr. Bradstreet do the worrying and assume he can keep his excellent track record going. My opinion doesn't make any difference to anything or anyone.

 

Having said that, posters exploring the pros and cons is educational and informative so please keep at it.

 

Bottom line though, is that no one knows where rates are going to go at this point. My concern is that that Mr. Trump may be building a 'house of cards' and his tariffs are going to raise prices. Rising prices is the definition of inflation and higher interest rates usually result.

 

As one who paid 17.5% on his mortgage back in the inflationary 1980's, all I can say is, buckle up because things could get nasty. JMHO.

[Hoodlum]

RBC Analyst upgraded Fairfax to $2200US.

 

“Q2/25 Operating EPS was ahead of both our and consensus forecasts driven by investment gains (primarily Total Return Swaps),” he said. “Underwriting results were ahead of our expectations driven by a lower combined ratio and we believe worker’s comp (Zenith) is turning a corner after years of declining premiums. Balance sheet remains strong with $3B of cash and a 26-per-cent leverage ratio. We continue to believe FFH stock is overly discounted, trading at 1.4 times P/B.”

[wondering]

Is Fairfax too complex to be valued at the same metrics as its insurance peers?

 

I raise this question because I have read this criticism twice from analysts.  Once from the RBC analyst mentioned above (see attached full report) and another from an analyst on Seeking Alpha https://seekingalpha.com/article/4790903-fairfax-holdings-misunderstood-conglomerate-with-some-upside

 

What is the complex part of Fairfax?

• TRS investment 
• private equity holdings
• other

I can understand how the TRS might be view as complex (I have to admit re-read the explanation of the TRS 5 times before I begin to understand it).  Are the private holdings too difficult to model for income projections?

 

I know Safetybynumbers has argued that Fairfax has the low value metrics because it doesn't screen well for the quants.  Maybe screening well and complexity is the same thing?

 

Could this problem be fixed by greater disclosure or explanation in the annual report?

 

 

1654 (1).pdf

[villainx]

If "complexity" keeps the price from running up, I'm okay with it.

 

[djokovic1]

2 hours ago, wondering said:

Is Fairfax too complex to be valued at the same metrics as its insurance peers?

 

I raise this question because I have read this criticism twice from analysts.  Once from the RBC analyst mentioned above (see attached full report) and another from an analyst on Seeking Alpha https://seekingalpha.com/article/4790903-fairfax-holdings-misunderstood-conglomerate-with-some-upside

 

What is the complex part of Fairfax?

• TRS investment 
• private equity holdings
• other

I can understand how the TRS might be view as complex (I have to admit re-read the explanation of the TRS 5 times before I begin to understand it).  Are the private holdings too difficult to model for income projections?

 

I know Safetybynumbers has argued that Fairfax has the low value metrics because it doesn't screen well for the quants.  Maybe screening well and complexity is the same thing?

 

Could this problem be fixed by greater disclosure or explanation in the annual report?

 

 

1654 (1).pdf 1.38 MB · 14 downloads

 

I don't think complexity is the issue. From an analysis perspective its no different from a Berkshire or Markel.

 

I am pretty certain because of the 2010-2020 period lot of investors have written of Fairfax / Prem as a bad capital allocator without going into the details. I was guilty of this too initially. I have seen this come up multiple times as a reason investors haven't dug into Fairfax when I have mentioned it to them recently.

 

That perception will inevitably change over time as long as the stellar execution continues. It already has a decent bit from 2020 but intrinsic value has also grown significantly since then.

Edited August 5, 2025 by djokovic1

[SafetyinNumbers]

6 minutes ago, djokovic1 said:

 

I don't think complexity is the issue. From an analysis perspective its no different from a Berkshire or Markel.

 

I am pretty certain because of the 2010-2020 period lot of investors have written of Fairfax / Prem as a bad capital allocator without going into the details. I was guilty of this too initially. I have seen this come up multiple times as a reason investors haven't dug into Fairfax when I have mentioned it to them recently.

I think there are a lot of reasons for the discount. Complexity is part of it because investors are lazy for the most part and if a stock doesn’t pass initial screens they are ignored. Fairfax also invests in securities most quality investors (growing majority since the GFC) wouldn’t touch like commodities and emerging markets. It’s hard for people to own Fairfax if they wouldn’t own their portfolio for heuristic reasons. Lower passive ownership than MKL and BRK is also a big part of the discount. 

[djokovic1]

@SafetyinNumbers Yes thats a good point re. a) low passive ownership and b) investing in stuff that most quality investors would pass on (although that is somewhat correlated to not trusting their capital allocation possibly influenced by the 2010-2020 period).

 

More passive ownership as you have alluded to is also a question of when not if.

Regardless, the obvious good news is while it remains undervalued, the more chance for FFH to create value through buybacks/TRS.

Edited August 5, 2025 by djokovic1

[glider3834]

On 8/4/2025 at 5:27 PM, nwoodman said:

Extra holdco liquidity gives them a bit more optionality/buffer too.  

Yes agree - the key to TRS is liquidity to support it and strong operating performance to build that liquidity further - TRS also locks up 8% of their shares outstanding for potential repurchase in future & this provides valuable optionality - so if liquidity is there and continuing to build - and Fairfax still see TRS as a good investment - makes sense IMHO to keep it on