JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said it’s possible U.S. growth and inflation prove fast enough to prompt the Federal Reserve to raise interest rates more than many anticipate, and it would be wise to prepare for benchmark yields to climb to 4 percent.
“It might force the 10-year up” if the Fed boosts short-term rates more than expected, Dimon said in an interview with Bloomberg Television’s Stephen Engle in Beijing, referring to the yield on 10-year Treasury notes. “You can easily deal with 4 percent bonds and I think people should be prepared for that.”
As long as rates climbed because the U.S. economy was in good health, the move would amount to “normalization,” Dimon said.
With the Fed paring back its balance sheet and the federal government increasing its borrowing, the U.S. will have to finance by the end of the year “$400 billion a quarter — that’s a lot, that’s a huge shift from the past,” Dimon also said. Along with cutbacks in bond purchases by other central banks, it “may cause more volatility, higher rates in a way we don’t fully understand” given the exit from quantitative easing is unprecedented, he said.
(Related: Readying for Higher Interest Rates)
The JPMorgan CEO spoke in a week when the U.S. will auction a combined $73 billion of coupon-bearing securities as the Treasury boosts issuance to cope with a swelling deficit. While supply concerns have prompted some to declare the end of the decades-long bull market in bonds, others see 10-year yields staying relatively contained.
In the first of three note offerings this week, the Treasury will auction $31 billion of three-year notes Tuesday, followed by 10-year and 30-year sales on Wednesday and Thursday. The new 2021 note is currently yielding around 2.65 percent in when-issued trading ahead of the sale, while the benchmark 10-year rate is at 2.95 percent.
Billionaire bond investor Bill Gross at Janus Henderson said in a May 3 interview he expects the yield to “meander” between 2.80 percent and 3.15 percent for the rest of the year — in what he termed a “ hibernating bear market.” Dan Ivascyn, who runs the world’s largest actively managed bond fund at Pacific Investment Management Co., said last month that it was “ premature to begin declaring a bear market” and that yields beyond 3 percent could present a buying opportunity.
For Dimon, the key is that markets are in uncharted territory when it comes to what central banks are setting out to do.
“We’ve never had QE, we’ve never had reversal,” Dimon said.