Considering Selling the Long End
Thursday, December 13th, 2012This 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:
| Action | Date | TLT 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.
