Jamie Dimon recently came out with an ominous prediction: "Bond market is going to crack."
We have already started to see this play out.
Bond yields are surging, job growth is slowing, and the deficit is about to explode.
Here is what Jamie Dimon sees coming: 🧵 $S&P 500(.SPX)$
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1/ When Jamie Dimon speaks, we listen.
He took JP Morgan Chase unscathed from the 2008 Financial Crisis and played a pivotal role in containing the 2023 Banking Crisis.
Now he warns us all that the bond yields will explode.
2/ It's not just Jamie Dimon.
Two weeks before him, Ray Dalio also warned about basically the same thing.
There will not be enough demand for the US bonds.
This can potentially kick the US into stagflation.
How?
3/ Look at the yields.
Since the Fed started cutting in September last year, 10-year yields surged while 2-year yields plummeted.
The Market believes that lower rates will be short-lived and the Fed will have to start raising rates.
Why? Because of the fiscal mess of the US.
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4/ US debt currently sits at $36.2 trillion.
What's worse is that the US needs to refinance $7.2 trillion of it in 2025, as it can't pay it.
This comes when the macroeconomic developments aren't welcoming to refinance a massive $7.2 trillion.
Let me explain.
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5/ There are two major issues.
The Fed has been shrinking its balance sheet since 2022 to tame inflation. This means it's buying fewer bonds.
Major foreign holders of the US debt, like China and Japan, have also been dumping it.
This drives the market yields up.
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6/ This forces the Treasury to offer higher yields in new auctions to attract investors.
If it doesn't, investors will just buy from the open market, and the auction will incur the risk of failing.
We started to see this play out.
Two weeks ago, the 20-year bond auction closed at a higher rate than expected.
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7/ There are only two ways out of this:
Either the Treasury keeps offering higher yields or the Fed steps in and buys government bonds to bring down the yields.
Both mean more money printing, so more inflation.
In each case, the Fed will have to raise rates again eventually.
8/ When this happens, the US will be left with even higher yields with high inflation.
Economic activity will slow down drastically, unemployment will surge.
Textbook definition of stagflation.
There is only one way out.
Aggressive spending cuts now.
9/ Yet, it doesn't look probable in the short to medium term.
Congress just passed a massive spending bill filled with tax breaks.
Those tax breaks are partially financed via cuts in services like Medicaid, though they aren't enough.
The bill is projected to add $2.5 trillion to the US deficit in the next 10 years.
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10/ Result? It isn't likely that yields will come down soon.
If it goes like this, it'll be very hard to find buyers for the US debt.
This is what both Dimon and Dalio warn about.
There is a narrow path the avoid this, though it's unlikely given the agenda of the government.
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