Dec. 19, 2022
Brian Erickson, Vice President, Fixed Income Research and Strategy – Ameriprise Financial
Justin Burgin, Vice President, Equity Research – Ameriprise Financial
Over the past 14 years, investors have embraced an acronym that represented the prevailing logic for diversifying assets.
The acronym: TINA. The meaning? There Is No Alternative…to owning stocks.
It’s a motto that has served many investors well in a post-Great Recession world. Throughout the past decade, investing in fixed income has been difficult as bonds — faced with headwinds like low interest rates — offered meager yields.
But as we close the chapter on a year of rising interest rates, during which equities struggled and U.S. bond yields climbed higher, it appears that the era of TINA may also be over. And in its place, a new investing adage, the acronym TARA — There Are Reasonable Alternatives — appears poised to take the helm.
How TINA became the conventional investing wisdom for 14 years
TINA’s roots go back to the Financial Crisis, when the Federal Reserve (the Fed) took traditional and unconventional steps to stabilize the economy, resulting in dovish monetary policy and remarkably low interest rates that persisted until recently. Further, measures taken by the Fed in response to the COVID-19 pandemic have kept TINA relevant in recent years.
Here’s a refresher of the Fed’s actions:
The net result of the Fed’s monetary policy between 2008 and 2021 was a significant contraction for interest rates that culminated in the 10-year U.S. Treasury yield dropping to a record low of 0.5% in August 2020. Even as the economy recovered from COVID-19, the Fed’s quantitative easing continued to keep rates lower, with the 10-year U.S. Treasury yield entering 2022 at ~1.50%. Importantly, fixed income investors and savers faced a 14-year headwind of historically low rates with limited avenues to generate income.
To codify the 14 years of extremely low interest rates, investors embraced the acronym TINA. As the Fed lowered rates to spur lending and economic growth, stocks benefited, and fixed income investors moved to riskier assets (such as stocks) in search of yield.
Between October 2008 and February 2022, the Fed funds rate averaged just 0.50%. However, the dividend yield on the S&P 500 Index averaged approximately 2% over that period.
In our view, it is difficult to quantify the tailwinds stock prices received during the extended era of record-low interest rates. But the larger message for investors is that TINA may have officially left the building and there are now reasonable alternatives to stocks that can help produce income.
Today, alternatives to stocks abound. If TINA is on its way out, TARA — There Are Reasonable Alternatives — seems fitting today.
After ending last year at just 1.75%, the yield on the Bloomberg U.S. Aggregate Index nearly tripled to 4.78% by Nov. 14, the highest level since November 2008. (The U.S. Aggregate Index represents high-quality bonds, including U.S. Treasuries, agency mortgages and U.S. Investment Grade Corporate Bonds, the critical ingredients in long-term fixed-income portfolios.)
Source: Bloomberg L.P., Dow Jones Indices, and Standard & Poor’s Indices
For illustrative purposes only. Past performance is not a guarantee of future results.
While the rising yields produced falling prices that ultimately resulted in a -15% total return through October on the Bloomberg U.S. Aggregate index, the sell-off reset opportunities across fixed income.
What are the reasonable alternatives today?
Similar to how a stock market sell-off can create opportunities, the challenging sell-off across fixed income this year sent prices lower, boosting yields on new investments.
Under TINA, investors were left with two options: buy equities or lag behind. The most remarkable dimension of the repricing this year is the breadth and number of strategies investors can look to for fixed income once again.
Today’s reasonable alternatives include:
Earn returns on emergency cash: Cash investments such as money market funds and ultra-short bond funds offer moderate yields.
Fixed income allocations earn solid yield: High-quality bonds will likely exceed inflation over time and support long-term investment income strategies. For example, the Bloomberg US Aggregate Index offers greater yield than the S&P 500 Index or the Dow Jones US Select Dividend Index.
- Bonds as an equity alternative: Achieve yields of 8%+ with corporate bonds indices like the Bloomberg U.S. Corporate High Yield Bond Index.
Fixed income is back
Today, investors can get back to the basics of fixed-income investing and right-size risk that may have become distorted over the past decade. If you’re interested in exploring reasonable alternatives (TARA), reach out to your Ameriprise financial advisor. They can make recommendations appropriate for your unique situation and long-term financial goals.