"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.

Comments

cheka pods Tue, 05/08/2018 - 09:57 Permalink

there is no unwind.  just more shell game manipulation

frbny is raising rates because of 'wage pressure'.  they hide and/or tolerate all kinds of rising prices.  but the minute that somebody in flyover might get a raise....time to jack up rates until millions are newly unemployed and wage pressure gone

In reply to by pods

sabaj49 Seasmoke Tue, 05/08/2018 - 09:30 Permalink

I for one am ready for u.s. to declare bankruptcy(and nothing less)

for 1 - all u.s. debt that has be foisted upon taxpayers is FRAUDULENT and therefore odious - ie NULL AND VOID

I would declare debt jubilee and let all creditors take hit for buying worthless junk

just think what a 100% reset of debt would do

of course I also want

1. LIMITED SPENDING by fed govt - say 8% of GDP

2. LIMITED BORROWING - say 20% GDP by any govt entitity

3. LIMITED TAXATION by ALL govt entities - again 8% VAT and no income tax

4. biggest is BALANCED budget

5. fair trade - want to sell us $1,000,000,000 of stuff then buy $1,000,000,000 1st

In reply to by Seasmoke

Sonny Brakes KimAsa Tue, 05/08/2018 - 10:05 Permalink

And who is going to be left holding the bag? You? Me? Trump?

Maybe, but investors must eventually come to the realization that not all of their investments will yield results. If this is too hard for people to understand then how is it the fault of the debtor? Winning investors don't typically bailout losing investors so why should future taxpayers be liable for making investors whole.

If it sounds too good to be true then it probably is. Anyone who was promised and believed that if you spend 20 to 40 year of your life working so that you can spend 20 to 40 years of your life not working while expecting the next generation to make up the difference; is due for a rude awakening.

In reply to by KimAsa

tmosley KimAsa Tue, 05/08/2018 - 10:30 Permalink

Probably the Chinese and anyone else dumb enough to be caught holding treasuries while not being an American citizen.

Though it will be a negotiated deal most likely. Haircut of current debt obligations in exchange for some concessions here or there. Maybe we agree to push Taiwan to reunify with China. That would be well worth it to the Chinese.

In reply to by KimAsa

tunetopper lester1 Tue, 05/08/2018 - 10:01 Permalink

yes, he has done it before - 4 times with his own C-Corps.  But now he is sooo much smarter. His Minister of Economics, LARRY "NOT SURE" KUDLOW, will make all things good.  Wait a minute..... now where did LARRY get his Masters or PHD in ECONOMICS>  oh, OK, thats alright.. he can take some night courses at the local college.

In reply to by lester1

east of eden sabaj49 Tue, 05/08/2018 - 10:44 Permalink

No, no, no dear boy. Sovereign governments that are duly elected under a Constitution have the right to pass taxation and spending laws. You don't have odious debt, you just have debt you don't like.

Now odious debt is what Richard Nixon, Congress and the Big American banks did to Latin America in the 70's and the 80's. The scam worked like this. Use the CIA to overthrown unwanted government and install dictator. Get dictator to order national banks to take out huge loans from American banks at punishing interest rates. Dictators cut goes to Switzerland. Bankers cut goes to the Caymans. Country is on the hook for billions of non-performing capital so Wall Street destroys the value of their currency and the US gets bananas, coffee, aluminum, wood products, vacations, fruits and vegetables and labor for 10 cents on the dollar, forever. That is ODIOUS DEBT.

In reply to by sabaj49

RedDwarf sabaj49 Tue, 05/08/2018 - 12:26 Permalink

"I for one am ready for u.s. to declare bankruptcy(and nothing less)"

This will never happen.  Governments always print their currency to oblivion instead.  Rather than honestly default, they use inflation.

"for 1 - all u.s. debt that has be foisted upon taxpayers is FRAUDULENT and therefore odious - ie NULL AND VOID"

All taxation is theft, so of course it's null and void ethically anyway, but that does not change the reality that you are forced to pay.

"I would declare debt jubilee and let all creditors take hit for buying worthless junk"

Yes, that would be good, but the oligarchs who have bought the politicians are the ones making these calls.

"just think what a 100% reset of debt would do

of course I also want"

I want the printing press taken away from government for good.  Until we have separation of Bank and State we can never have limited government.

"1. LIMITED SPENDING by fed govt - say 8% of GDP

2. LIMITED BORROWING - say 20% GDP by any govt entitity

3. LIMITED TAXATION by ALL govt entities - again 8% VAT and no income tax

4. biggest is BALANCED budget"

You do know that constitutionally the government should only be using gold and silver as money right?  If the constitution were being followed at all you would have a government of limited means already.  So this is wishful thinking, not an action plan.

Also GDP is a terrible measure to use and VAT is a onerous tax and very intrusive.

"5. fair trade - want to sell us $1,000,000,000 of stuff then buy $1,000,000,000 1st"

Fair trade, that term does not mean what you think it means.

First, who is 'us' and who is 'they'?

If you mean the governments in question then you are calling for banning of any trade except by governments.  Totalitarian, but simpler than if you mean trade by people.  By definition you cannot dictate to people what they should buy and for what price unless again if you do away with liberty and implement a totalitarian regime.

Also, even if one country has trade barriers, there is no reason to respond.  Trade barriers harm the country that erects them far more than the country they erect them against.  If you want to sell me goods and services for cheaper than I can get them elsewhere, but refuse to buy from me, I am still economically better off buying from you, and you are economically worse off for not buying the stuff I can make more cheaply or at a higher quality than you can get elsewhere.

This is something nearly every major school of economic thought agrees upon.  Look up Ricardo's Law of Comparative Advantage.  Trade deficit stuff is political propaganda.  You have a trade deficit with your barber.  You give him money for a service.  He never reciprocates by buying something back from you.

In reply to by sabaj49

spastic_colon Tue, 05/08/2018 - 09:25 Permalink

in the meantime "they" were able to bring futures back to life this morning riiiiiiiiiiiight before open...............

"....... in a way we don’t fully understand..."

because you understood, so well, lower rates......in a way.....correct?

666D Chess Tue, 05/08/2018 - 09:28 Permalink

"We Don't Fully Understand" Impact Of Unprecedented QE Unwind and I would add that we don't have to understand it because QE is here to stay. QE4: The printing press strikes back in cinemas 2019. 

Yellow_Snow lester1 Tue, 05/08/2018 - 11:28 Permalink

The debt is Amerika's albatross...  There is no magical way of getting out of it...  Default is out of the question (no pipedream debt jubilee).  The obvious way Amerika will deal with this is piling on new debt at an exponentially increasing rate...  until the entire system stagnates (stagflation) under the weight of it's debt payments...   Only consolation, is most every other nation in the world will be in the same situation.

In reply to by lester1

navy62802 Tue, 05/08/2018 - 09:29 Permalink

They don't understand because the nature of bubbles is you don't see them until they pop. And the fed policy for the past decade has undoubtedly created massive bubbles throughout our economy.

taketheredpill Tue, 05/08/2018 - 09:37 Permalink

"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."

 

When was the last time ZERO Fed Funds was considered "normal"?  Negative rates in Europe Japan??  

 

Nothing that happened before 2008 can be applied to the current situation with any degree of confidence.

 

 

PROBLEMS HAVE SOLUTIONS.  PREDICAMENTS HAVE OUTCOMES

(Archdruid @ 2007)

 

 

 

tunetopper taketheredpill Tue, 05/08/2018 - 10:10 Permalink

"We’re not completely in a normal situation, but we’re getting closer to that state"

 

"Nothing that happened before 2008 can be applied to the current situation with any degree of confidence."

 

The world followed the US down the path of QE... we started it.  Now the world is addicted to using their central banks to hold debt printed by their govt. 

 

We created a debt addiction, and now we are addicted to our own drug.  When someone on Bloomberg or CNBC or even Fox Businesss will admit to this  we can begin to address the Predicament!

The only thing that can happen which will put a bright light on this situation is for a group of countries that have stable currencies and NO QE on their Central Banks balance sheets, to band together and create a joint currency like the Euro tried to do. 

 

The  EU unfortunately has relied too much on socialism - and embraced QE--a form of it---and now they are screwed.

 

In reply to by taketheredpill