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:

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.


  • Greg says:

    David – I can’t remember where I read this first, but there is a “bond indicator” that compares the Moody’s Baa index yield with its 200 day moving average… and that has worked quite well historically for allocating in and out of corporates.

    Did I read about that indicator on your blog (in the past)? Is that indicator flashing red now?

  • Greg says:

    Follow up … think I may have seen this bond indicator on Tom Brakke’s blog:

    The indicator seems to be signaling all clear for now (I pulled data from St Louis FRED database) — but I tend to agree with the concerns in your post.

    We will all pay a terrible price for what Bernanke is doing.

  • says:

    sell TLT and buy short.

    Any thought about something like in place of buy short?

    – Inverse ETF such as TBF

    – Buy the put or sell the call vertical spread.

    • I’m a low-complexity guy with bond strategies & ETFs. Also, if I use levered, inverse ETFs, or use options, I would have to get new E&O insurance — quite expensive.

      I stick with what I know, and try not to over-optimize.

  • richt says:

    Wow, that is a very interesting call, because it seems to me that up until recently you were thinking that it could be a long time before rates and inflation went up. (We even had a little Twitter exchange about it a couple weeks back).

    Am I misinterpreting your views, or is this a pretty fundamental shift in your outlook?


    • The operative word is “consider.” I haven’t sold it yet. What I am seeing is that the market may be operating on a different basis now, but I am waiting to see confirmation of that.

      Though I thought low rates could remain for a long time, that did not preclude my looking for a change in behavior — I asked both leading deflationists (Schiller & Hoisington) what would lead them to change their views. Both said a rise in bank lending leading to inflation.

      We may be at that cusp now; thus, I am watching closely.

      • richt says:

        Thanks David. I look forward to hearing your evolving thoughts on the matter. This is a huge question (perhaps the biggest of all).

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