Considering Selling the Long End
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:
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.