Considering Selling The Long End

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Includes: LQD, TLT
by: David Merkel, CFA

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 and 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.

Disclosure: long TLT & LQD, but might be moving for cover.