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%

Click to enlarge

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.