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Archive for December 13th, 2012

Considering Selling the Long End

Thursday, December 13th, 2012

This will not be a long post.  My bond strategy has always included longer bonds from LQD, and very long bonds from TLT.  They have made money for me & my bond clients.  But now I am thinking of selling them.  Why?

Let’s consider the history of QE:

ActionDateTLT Return






Operation Twist









Now, QE2 was kind of wimpy, and disappointed the markets.  All the other actions qualified as bold, but bold actions are not moving the needle at present.  Why?

I suspect that bond investors are embedding higher inflation forecasts into their prices, and that the balance has tipped. Inflation is coming, and I am likely to trade away longer nominal bonds for short bonds, and inflation-adjusted bonds.

The market is responding differently to loose monetary policy than it used to respond.  Time to adjust; the illusions of the Fed are finally failing, I think, and markets may be about to discipline them with stagflation.

Full disclosure: long TLT & LQD, but might be moving for cover.


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

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