Jamie Dimon warned that the U.S. bond market would “crack” under the weight of the country’s rising debt as he called on the Donald Trump administration to put the U.S. on a more sustainable trajectory.
JPMorgan Chase CEO said Friday he warned regulators: "You'll see cracks in the bond market." He added: "I tell you this will happen. You'll be frightened. I won't panic. We'll be fine."
The head of the largest U.S. bank has warned that the increased risk in the U.S. bond market has set the cost of borrowing global debt, highlighting Wall Street's growing uneasiness with rising levels of government debt. This is because Congress is reviewing Trump’s “big and beautiful” budget bill, which would significantly increase the federal deficit if generally expected to pass.
Even before legislation last week voted by the House and reviewed in the Senate, the Congressional Budget Office expects U.S. debt as a share of GDP to exceed the ERA peak in the 1940s in the coming years.
U.S. long-term bonds are under pressure on fiscal concerns, and starting from early 2024, the 30-year treasury yield has gone from just over 4% to more than 4%. Moody's also deprived the U.S. third-tier credit rating this month.
As the government increases spending, especially during the coronavirus pandemic, the Treasury bond market has grown from about 5tn in 2008 to 29tn today due to government cuts taxes. The market is the deepest, liquidest in the world and has long benefited from the privilege of the dollar.
But as the debt burden increases, demand has also taken a hit. Foreign investors have been steadily retreating over the past decade, a move exacerbated by Trump’s tariffs.
Dimon said global geopolitical tensions, trade wars and soaring debt levels mean that the "tectonic plate" of the world economy is changing.
"I just don't know if this will have a crisis in six months or six years," he said at the Reagan National Economic Forum in California. He called on the government to "change the trajectory of debt" and urged regulators to ease restrictions on banks to improve their ability to trade bonds. “I think we can make everything better by changing and modifying some of these rules and regulations, including everything.”
His comments echoed comments from Goldman Sachs President John Waldron, who earlier this week described the U.S. deficit as “somewhat concerns” and warned that its impact on the bond market is “the biggest risk to the macro right now.”
"I think, as far as you see, we're going to see clearly, we're going to have a bigger deficit, we're going to have more Treasury borrowing," Waldron said. "The biggest risk is that long-term interest rates continue to be backed up, the cost of capital in the economy is rising, and fundamentally starting to be the brakes for economic growth," he said at the Bernstein meeting in New York.
The Independent Commission's federal budget will increase by at least $330 million by 2034. Moody's warned that the bill would increase the U.S. deficit from 6.4% last year to 9% by 2035.
Dimon also said the U.S. should increase taxes on carrying interest, a provision in the tax law that favors private equity executives.
Trump endorsed the idea, which has long been the goal of Democrats including former President Barack Obama. "We should definitely be taxed," Dimon said. When asked if he would consider the campaign office, Dimon, 69, said he would "if I thought I could really win, I wouldn't have won."