Putting the L in TLT

Time to reappraise the Fed strategy

All right, this whole TLT thing might not be working out.

I made a bet that I could time the Fed’s reversion back toward a low NGDP growth policy, and that such a move was nigh. I’ve been stacking TLT, the main long bond ETF that benefits from lower long term interest rates, for over a year. I stacked aggressively in late 2024 and early 2025. On net I’m down about 7% on my TLT position.

In my defense I will note how I was very clear I was NOT selling any of my longs. I’m still up nicely in recent weeks due to my insanely recklessly risky longs. Yet when stocks were down earlier in the year, where I was losing wealth in aggregate but clawing back my then -5% losses on TLT, I was glad. I fell in love with the idea of Fed implicit tightening leading to a Bernanke-Yellen style short rate draw down necessary to accommodate waning NGDP growth. That would pull long rates down too and the reversion to the financial world of 2015.

That hasn’t happened. US bonds appear to be increasingly beset by a default risk premium. Nominal growth is probably slowing a bit, we probably will get our short rate cuts and I may eventually get my long rate decline, but it might take two years or more. In two years certain Milei-loaded Argentine stocks can 5x. Who knows that BTC or some other exciting companies can do, but certainly they can double. The upside on TLT, if everything went as I expected, was never more than 30%.

I have a general rule against selling assets, and against reactive trading. As a result I am NOT dumping my TLT currently, but I want to. I’ve sold a bit. I will continue to cautiously draw down the position.

Reappraising the Fed’s strategy

I figured the Fed had various reasons for wanting inflation to be about as low as possible without causing a cascade of job losses. NGDP below 4% YoY, and PCE inflation sub 1.8%. I reviewed the recent PCE dollar aggregate series and have to conclude there’s no evidence really of a rush back to low inflation land.

I look at monthly personal consumption expenditures (the ‘C’ from the C + I + G + NetExports = GDP identity) is because it’s a good, high frequency proxy for GDP growth. What we can see in the latest series is that YoY growth in C was 5.4% in April 2025. Right around where it was for the last year and a half.

Nominal growth north of 5% is consistent with about 2.5% CPI inflation, maybe 2.3% PCE inflation. Now oil prices are down and firms put in aggressive price increases in 2023 so we might be experiencing some brief abatement in inflation now. I guarantee you though, if PCE growth holds above 5%, we’ll see inflation pop back up.

I assume the Fed knows this. I assume they have incredible time series models and they are OK with inflation being somewhat above their 2% target. My working explanation for this is that they want to run the economy a bit hot, because that allows nominal rates to be higher. They want high nominal rates because they want congress to feel the pain of interest payments.

Or maybe they have something else in mind. The point is I can’t hang out in government bonds waiting for this monetary reset. It would have been cool to pull off timing it, but events move long, there’s all sorts of interesting risk to take. If my old hypothesis does play out immediately following my last TLT liquidation, well so it it, I’ll take that L too. Like I said, I’m not unwinding it over night, but will plan to sell off these TLT lots as they age into long term losses, and roll the proceeds into risky long term holds.