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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
QE4

12/12/2012

-1.16%

QE3

9/13/2012

-0.39%

Operation Twist

9/21/2011

3.31%

QE2

11/3/2010

-2.04%

QE1

11/25/2008

2.94%

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.

Disclaimer


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.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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