Interest Rate Benchmark At 7%? Jamie Dimon Wonders If We’re Prepared

What if the Fed keeps raising rates and someday soon 7% is the new benchmark?

In a Times of India interview, the CEO of J. P. Morgan, Jamie Dimon, says the investment world may not be ready for inflation-fighting of that order. As one of the key banking executives globally, Dimon’s words are taken quite seriously.

It’s not that surprising to see concerns like this given the years-long up trend on Treasury yields and what’s described by bond professionals as “the stickiness” of inflation.

The point-and-figure chart for the 2-year U. S. Treasury yield looks like this:

Now at 5.09% and up from the March 2020 pandemic scare low of .13%, it’s easy to see how close 7% looks. Such a move would take this rate back to a level unseen since 1994. The effects on the bond market in general — and on all interest-rate sensitive investments — might be as difficult and dramatic as Dimon suggests.

Here’s the chart for the U. S. Treasury 10-Year yield:

Shown in basis points, the yield at 4.519% is up from the 2020 low of .40%, a remarkable upward trend accompanied by downward bond prices.

The 30-year U. S. Treasury yield chart is here:

This one also shows basis points, the yield now is up to 4.647% from the low in 2020 of .80%. It hasn’t been this high sincshe 2011.

Here’s the chart for the benchmark iShares U. S. 20+ Treasury bond ETF:

From a peak of $168 in early 2020 to the current $90 — that’s a 46% drop in just over 3 years. If Jamie Dimon’s warning about a 7% yield were to unfold, it’s possible this ETF could get back to that 2013 low at $80.

The interest rate sensitive world — including REITs, utilities, regional banks and many other related sectors — would all find it painful.

It all depends on inflation stickiness and how the Fed reacts.