Jamie Dimon took a break from his favorite pastime—lecturing us all about how remote work is a cardinal sin and stain on humanity—to rant about something else for once: the bond market.
“You are going to see a crack in the bond market,” the JPMorgan CEO said during an interview at the Reagan National Economic Forum last week. “It’s going to happen.”
Dimon isn’t the only to point out that the usually staid, solid bond market is the latest corner of the financial world to get caught in the crossfire of both the ongoing trade war and President Trump’s deficit-widening tax bill.
A steep selloff of 10-year Treasurys pushed yields higher last week as investors fretted that the Republican fiscal package would increase the US deficit by $2.7 trillion over the next decade. Moody’s added fuel to the fire after it revoked the triple-A credit rating on US debt due to the risk to the national deficit. And it didn’t help that an auction of 20-year Treasury bonds was met with weak demand.
But US treasury bonds aren’t the only problem child in the fixed-income world right now. Yields on Japanese 40-year government bonds hit an all-time high last Thursday due to fears about an ongoing global economic slowdown.
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Wait, how does what’s going on in Japan affect the US bond market? Turns out that the threat of skyrocketing yields in Japan could trigger a massive exit of Japanese capital from US markets, analysts warn.
How to invest in bonds today
The eyes of Wall Street titans are focused squarely on upcoming Treasury bond auctions, which illustrate how much demand there is for US debt.
One thing there’s very little demand for across the market right now: long-term bonds.
“Our strongest conviction has been staying underweight long-term US Treasuries,” BlackRock Investment Institute wrote today. Analysts there are in good company: A swath of Wall Street is bailing on 30-year bonds, while none other than Warren Buffett has been bulking up on short-term bonds instead.
The big picture: “While there is a risk that deficit fears lead to progressively higher yields in the weeks ahead, we believe that the Fed and/or Trump administration would likely make adjustments in the event of much higher yields,” wrote UBS CIO Solita Marcelli in a recent note. “In our view, this means high grade and investment grade bonds represent good value at current levels for investors seeking portfolio income.”—LB