Control Panel: Bonds, TINA and TARA

No longer are we in the days of what Wall Street calls TINA (There Is No Alternative to stocks). Instead investors are welcoming the days of TARA (There Are Reasonable Alternatives) with bonds.

Since the value of a bond drops when prevailing interest rates rise, the owners of existing bonds (such as long-term Treasuries from 2020 with very low yields) have lost a lot of money during 2022. (Along with all other assets, such as stocks.) But new bonds are offering higher yields.

What Types of Bonds Deliver the Best Returns?

We looked at the performance of all sorts of fixed-income securities over the past 50 years. Here’s what we found.

By Derek Horstmeyer, The Wall Street Journal, Dec. 3, 2022

We decided to investigate fixed-income returns over the past 50 years to determine which sections of the bond market have done best on a risk-adjusted basis. To sum up: U.S. long-term bonds led the field and outperformed U.S. dollar-denominated international bonds by a healthy margin. [That is because of the continuous decline in interest rates since 1980 which will not necessarily continue since rates hit rock-bottom in 2020. --W]

But if you are worried about continued rate increases, you might want to position yourself in short-term U.S. debt. …During recessions, GNMA (mortgage/mortgage-backed securities) debt, along with U.S. long-term debt do the best on a risk-adjusted basis. [Interest rates usually fall during recessions so high-yielding AAA mortgage debt has both low risk and good capital appreciation. – W]… [end quote]

Standard portfolio theory is based on the historic observation that stock values drop during a recession while bond values rise (due to falling interest rates) so the combination stabilizes the widest swings in porfolio value.

Since the Federal Reserve has been pumping all asset values to bubble valuations, stocks and bonds values rose together and fell together during 2022. Investors who expected bonds to be safer than stocks got a nasty shock. Especially investors who bought long-term Treasuries that swung from a negative real yield in 2021 to positive 2.0% in October 2022, demolishing billions of dollars in value.

DH and I analyzed Treasury data to find what percent of 10 year Treasuries were bought by the Federal Reserve. I was stunned to see that the Fed’s purchases of the 10YT, the foundation of interest rates in the U.S., increased in a roughly linear trend from about 5% in 2007 to almost 25% in 2021.


The Federal Reserve is buying a quarter of 10YTs, while the federal debt increased as a percent of GDP to 121% in 2021.

Government spending is divorced from reality when the Fed buys a major portion of the debt with fiat money. Government spending is fiscal stimulus which directly causes inflation by increasing demand without increasing supply of goods and services.

The Fed is gradually decreasing its immense book of Treasury and mortgage bonds but they are still buying. If they stopped buying completely, freeing the bond market as in pre-2000 years, interest rates would spike. Never mind if they sold their bonds, which they can’t do because they can maintain their book value as long as they hold to maturity.

The stock market is having a party as if all shadows have passed and happy days are here again. The Fear & Greed Index is in Extreme Greed. The trade is risk-on as stocks are rising faster than bond prices. (Interest rates are falling.) Junk bonds are rising. The USD is falling. Oil is stable and natgas has dropped slightly.

The bond market is screaming that recession will arrive soon. The Treasury yield curve is inverted. The 10Y-2Y is the lowest it has been in decades and so is the 10Y-3 month. Longer maturity Treasury yields are falling which is a sign of expected recession, even as the Fed raises the short fed funds rate.

The Fed is repeating their warning that a slowdown in the rise of the fed funds rate does not mean they will stop anytime soon. They predict 5% in early 2023. Given the strong hiring report last week and strong wage increases driving inflation they may need to keep the fed funds rate high for an extended time and possibly go higher.

Rising interest rates, combined with soaring food and fuel prices triggered by Russia’s invasion of Ukraine, have hit the world’s poorest nations hard this year. Poor countries may force a restructuring of debt or possibly default in 2023. Debt issued by emerging-market governments and companies in their local currency reached $12.5 trillion in 2021, according to data from Bank of America that excludes China’s enormous borrowings in the yuan. That compares with $4 trillion in foreign-currency debt.

The regular Wall Street Journal survey finds economists think there is a 63% chance of recession in the next year. And a survey of economists and investors by the Federal Reserve Bank of Philadelphia shows expectations that gross domestic product will fall in three or four quarters are by far the highest since it started in 1968.

The stock market party resulted from Fed Chair Powell saying that the Fed would probably slow their fed funds increase to 0.5% in December instead of 0.75%. Traders may realize next week that this really isn’t such great news.

The METAR for next week is clouds moving in. There’s nothing on the horizon that will trigger a crisis. The rally that started in mid-October may last a while longer, but the chart is showing a pattern of lower highs and lower lows. It’s not a bull market and can’t be trusted since the Fed is tightening and all signs are for stagflation at best, recession probably.



William Bernstein - Playing Inflation Russian Roulette in Retirement

William J. Bernstein is a neurologist, co-founder of Efficient Frontier Advisors, an investment management firm, and has written several titles on finance and economic history. He has contributed to the peer-reviewed finance literature and has written for several national publications, including Money Magazine and The Wall Street Journal*. He has produced several finance titles, and four volumes of history,* The Birth of Plenty, A Splendid Exchange, Masters of the Word*, and* The Delusions of Crowds about, respectively, the economic growth inflection of the early 19th century, the history of world trade, the effects of access to technology on human relations and politics, and financial and religious mass manias. He was also the 2017 winner of the James R. Vertin Award from CFA Institute.


Fwiw, Bernstein’s discussion was worth a read.


The Fed owned about $9 TRILLION in bonds at the peak, and now owns about $8.5T after reducing their balance sheet over the last year or so. With 9 trillion, I assume you didn’t expect that they were only holding treasury bills (most commonly 3 month, 6 month, and 1 year bills)! I don’t even know if there are that many treasury bills at any given time. They had to also be holding a bunch of longer term debt (including mortgage debt) as well.

Yes, of course. Buying long-term Treasuries and mortgage debt was part of their strategy to manipulate long-term interest rates. What shocked me was the huge proportion of the issuance was bought by the Fed with fiat money. In some auctions, the Fed bought 40% of the issue. They bought none at other auctions, so I plotted a moving average. In 2021, the moving average was 24% of 10 year Treasuries bought by the Fed.

I think this is shocking.



" The Birth of Plenty: How the Prosperity of the Modern World Was Created," by William Bernstein, is one of the best books I have ever read. I recommend it to all METARs.



On your recommendation I just ordered a used copy (good condition) from Abebooks.

More of William Bernstein’s “Advisor Perspectives”

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Most recent article from 11/22 has this great nugget of sarcasm:
At the risk of being overly harsh, that wasn’t a yield curve, it was an IQ test.


If you read pdfs much, you can get this version (which I did a while ago) at:



Thank you. I don’t have a lap top and am a bit of a Luddite with my phone, so the used book ($4.99 vs. $29.99) works for me. When I am done, I give my books to a local bookstore that I like and support.