J.P. Morgan Chase CEO Jamie Dimon says he is against investing his personal wealth any further into long-dated Treasury bills because of the potential for a bond market crisis brought on by the U.S.’s $39 trillion in national debt.
Dimon has continually lobbied policymakers to take action over the debt—and they have continually disappointed him.
In an appearance on the Master Investor podcast, Dimon was asked whether he would be a buyer of long-dated government bonds at the moment. “Personally, no,” he responded. “I know that the inflation numbers were good yesterday … the thing about numbers, you dig into these numbers, I mean really dig into them, and I wouldn’t give them too much credence.”
He continued: “I would not be a buyer, and part of it is interest rates … I mean even if inflation was 2%, the 10-year bond should probably be at 4.5% to 4%, and the short rate should be 3.25% to 3.5%—and they’re almost there today.”
Dimon is speaking about the headwinds that will shape yields on government bonds on the longer end: Inflation expectations and government borrowing.
Long-term Treasuries—10-, 20-, or 30-year bills—behave as a temperature check for the economic outlook. As well as baking in inflation expectations, yields (or returns) on longer-term Treasuries provide lenders with benchmark rates for their loans: The low-risk asset of government borrowing, versus the interest repayments consumers are paying.
As such, these yields are reflected in the rates offered to borrowers elsewhere in the economy—think houses, cars, and credit cards.
Crisis fears
Of course, the basis of the bond market is the belief that the government will always have the ability to pay its debts—a pretty solid bet given the might of the U.S. economy and the central bank’s ability to influence the value of the debt through its money supply.
However, with the Treasury accumulating debt at a rapid pace—it’s now at more than $39 trillion and interest payments are due at the rate of $24 billion a week—economists and private market experts alike fear that, at some point, lenders will start demanding higher rates to reflect the risk associated with the funding.
The U.S. is currently operating at a debt-to-GDP ratio of around 120%, Europe at approximately 90%, and the UK at a little over 95%.
“These are very high debt numbers and very high deficit numbers, and we’re actually doing quite well,” Dimon said. “Usually you have to have like a great recession or a depression or to have a war, to have numbers like that.”
Dimon has often suggested that this issue will come home to roost and has once again advocated that policymakers “deal with it maturely and sit down.”
“That would be the far better way to do it,” the banker continued. “The other way is to wait for it to become a problem, and my guess is that’s what’s going to happen. And that will exhibit itself with higher interest rates, the market getting rattled a little bit, people talking about it constantly—remember the bond vigilantes—hopefully not worse than that, but it could be worse than that.”