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:
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.
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