Bert Dohmen Cautions the Rout in the Treasury Markets is Far From Over

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by Dohmen Capital Research
Tuesday, Mar 02, 2021 - 21:05

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Something very abnormal is going on with the central banks of the world. They seem to be fearful that the entire system of debt might implode. Their solution? Create more debt.

The Treasury bond markets, however, may have had enough for the near term. In last week’s trading, the prices of long-term Treasury bonds accelerated their decline as they plunged to a new 12-month low. Below we show the weekly chart of TLT, an ETF tracking the prices of long-term Treasuries, going back to 2014. Note that chart support was reached, which usually triggers a counter-trend move:

By the end of last week, the 10-year Treasury yield stood at 1.46%, a mere 7 basis points from the S&P 500’s dividend yield of 1.53%. From a yield standpoint, 10-year Treasury bonds are nearly as attractive as the average stock, but have much lower risk.

Of course, this doesn’t make Treasuries an attractive investment. On the chart above, we can see money has been fleeing the Treasury markets, as shown by the money flow indicator at the bottom of the chart.

Volume has spiked in daily trading for bond ETFs like these. The TLT smashed through our downside target last week, the March 19, 2020 low. Wells Fargo strategists called last week’s 7-year note auction “brutal,” as demand dried up.

For the past two months we have warned of the accelerating decline of T-notes and T-bonds in our short-term trading services, the Smarter Stock Trader and Fearless ETF Trader.

What's causing it? Increasing inflation fears. Commodity prices are confirming this. The chart of the DBC, an ETF for commodities, has soared since My 2020 along with the record infusion of liquidity by the Fed into the markets:

This is partly why cyclical companies like Energy stocks and commodity producers’ stocks have performed incredibly well recently.

But real (i.e., inflation-adjusted) interest rates are also beginning to rise, which is sending shudders across Wall Street. That is bearish for large companies with huge mountains of debt, including many technology stocks.

Speculative retail favorites like the mega-cap FAANGs and other “disruptors” were dealt major blows in last week’s trading. Shares of Tesla fell to new 2021 lows, losing 13.5% just last week alone. Shares of Amazon and Facebook broke below support at their 200-day moving averages.

The high-flying ARK funds saw massive outflows as investors withdrew their funds during the market decline. Look at the daily chart of their flagship ARKK ETF below: