Next week we will have 2011 rates of return for the indexes (unadjusted for dividends). We knew there would probably be significant political headwinds for stocks this year, but I never dreamed that U.S. government bonds would perform so well.

Next week we will have 2011 rates of return for the indexes (unadjusted for dividends). We knew there would probably be significant political headwinds for stocks this year, but I never dreamed that U.S. government bonds would perform so well.

When future interest rates have nowhere to go but up and inflation is rearing its ugly head, bond values will ultimately fall, but not necessarily in the short term. What I failed to anticipate was either the likelihood of the Federal Reserve to print another $600 billion to prop up bond prices by its purchases or the overwhelming success of that policy, at least in the short term.

This reminds me of the saying from the 19th century that one should never argue with a man who buys ink by the barrel. As I have noted before, the regulators charged with guarding the dollar’s value are unashamedly stealing its value in broad daylight. Not enough money? No problem. We will just print up some more. Why should we still prosecute counterfeiters and spend money to imprison them?

Another contributing factor may have been Mr. Public’s mistaken belief that our national debt is still as good as gold. While gold has dropped 16 percent from its high, it is still 12 percent higher year to date. Both gold and long bonds took off as our Congress punted on the debt crisis in early August. But the bonds have only slipped about 3.6 percent since their early October high. We will see how long the Fed can keep the entire dam from breaking.

The best way to have profited from this appears to be iShares Barclays 20+ Year Treasury Bond fund (symbol TLT). Through last Friday, it rose more than 25 percent and currently yields a little less than 3. When buying ETF’s like this, always make sure there is plenty of trading volume. In this case, average volume per day in the past three months is more than 10 million shares.

Bill Gross, manager of the giant intermediate term bond fund, PIMCO Total Return fund (PTTAX), spoke out on numerous occasions of the dangers of Fed policy. He shied away from buying U.S. long bonds and suffered a lackluster return this year of less than 3 percent through Dec. 23. On Sept. 30, the fund reported 48 percent in cash rather than bonds.

Vanguard’s Long Term Treasury fund (VUSTX), on the other hand, is a pure play and earned 25 percent. American Century Target 2025 Investors fund has produced a 27 percent return through last Friday as well.

For my part, I prefer Gross’ cautious approach and the lower risk represented by intermediate term bond funds, those that are not only invested in government credits. About half of those have had year-to-date total returns of 5 percent or better. That is not too exciting, but with the Nasdaq Composite index still being below zero for the year, it looks pretty good in hindsight.

Statistics obtained from Worden Brothers, Inc.