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?
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.