“You are going to see a crack in the bond market, OK?”; “It is going to happen.”
Source: JPMorgan CEO Jamie Dimon (speech at the Reagan National Economic Forum, May 30th, 2025)
Consensus thinking in the bond market is bearish. In particular, many are increasingly concerned about the ongoing loss of fiscal discipline in Congress under Trump (with the OBBB signed into law in early July). That follows on from the significant fiscal largesse under Biden – and is leading some to call for a ‘bond market crack’ (e.g. quote above).
Those concerns have been fuelled by (i) the risk of sticky inflation (from tariffs); (ii) the Fed’s ongoing ‘balance sheet run-off’ (which is increasing Treasury supply); and (iii) rising yields elsewhere (e.g. with sharply higher JGB yields in recent weeks). At some stage, therefore, there’s a risk of a ‘bond market riot’ (a return of the vigilantes).
Such events, though, rarely (if ever) happen when the consensus expects them. Of interest, in that respect, 10 year yields failed at the top of their downtrend last week (FIG 1). That is, they moved lower despite the stronger than expected (headline) CPI report. That may have reflected the subdued service sector inflation readings (which remain at low/normal levels, on a M-o-M basis, see FIG 2). Added to which, positioning is bearish, with plenty of bad news in the price. That’s illustrated, for example, by recent measured sentiment readings (which are bearish and generating a contrarian BUY signal for bonds). In the near term, therefore, and with ongoing signs of cyclical weakness in the US economy, the risk reward favours lower, not higher, yields.
FIG 1: US 10 year Treasury Yield, shown with 50 and 200 day moving averages
FIG 2: US service sector CPI (core measures, M-o-M %)
