"Perfect Storm" Hits Yields; Dimon Warns "We Don't Fully Understand" Impact Of Unprecedented QE Unwind

Jamie Dimon is worried. Between rising inflation and tax-cut-driven growth printing better-than-expected, the JPMorgan CEO told Bloomberg TV this morning that The Fed may raise interest rates more than many anticipate, and it would be wise to prepare for benchmark yields to climb to 4 percent.

And Dimon is confident that 'Murica can handle 4%...

“It might force the 10-year up [if the Fed boosts short-term rates more than expected]...

You can easily deal with 4 percent bonds and I think people should be prepared for that.

Bear in mind that 4% is still well below the 5.5% pre-2008-crash average for 10Y yields.

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. And as the yield curve shifts flatter and flatter, so VIX will rise with it...

Bloomberg notes that, 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.

Dimon's warning comes just days after billionaire bond investor Bill Gross at Janus Henderson threw in the towel temporarily on his bond bear market thesis. As we noted previously, he now 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.”

 

However,  Michael Hasenstab, Franklin Templeton’s chief investment officer for global macro, agreed with Dimon, telling Bloomberg TV this morning that 10Y U.S. Treasury yields will "easily" be higher than 4 percent.

Hasenstab warned, a "perfect storm" is pushing Treasury yields higher...

"In a normal situation with U.S. growth at 3%, inflation at 2% and rising, in history the 10-year yield would be 4.5% to 5.5%. We’re not completely in a normal situation, but we’re getting closer to that state."

However, he is not adding to his already large bet against Treasuries. Probably a good idea since the world and their pet rabbit is now short bonds...

This won't end well.