Bonds have more pressing issue than Jamie Dimon credit crisis warning

Risk in credit markets has received plenty of attention, from fears about private credit stress in 2026 to JPMorgan CEO Jamie Dimon, the chairman of the nation’s largest bank, saying this week — though he did not point to any specific credit market signals available — “We haven’t had a credit recession in a long time, so when we do have a recession like this, it would be worse than people think. It could be terrible.”

Dimon isn’t the only Wall Street veteran worried about the bond market’s long-term outlook. But as investors focus on the possible confirmation of new Federal Reserve chairman Kevin Warsh, many may be overlooking a shorter-term volatile reaction for fixed-income portfolios. When there is a transition at the Fed, treasury yields, duration risk, and credit spreads typically move faster as markets begin to reevaluate monetary policy.

“What’s really important over the next few weeks is this changing of the guard at the Fed chair level,” Paisley Nardini, managing director and head of multi-asset solutions at Simplify Asset Management, said on a podcast episode of CNBC’s “ETF Edge” on Monday.

Nardini explained that even if there is no urgent policy move, markets may start pricing rapidly in the future. A new Fed chairman could change his communication style and change the pace of future rate hikes or cuts. That could create volatility in the treasury market before stocks fully react, he said.

“I think markets are going to be really cautious about what that might mean. Anytime there’s a change of guard, markets are going to experience some volatility and we’re going to have to start pricing in what that means,” he said.

There was a lot of Fed news to digest this week. The Federal Reserve kept interest rates steady at its meeting on Wednesday, while the federal funds rate remained unchanged in the range of 3.50% to 3.75%. But the war and the rise in oil prices have upended policy-making assumptions by central bankers and bond traders who were betting on another rate cut in 2026. Fed Chairman Jerome Powell said the pressure on the economy from higher oil prices will likely continue, even if it has not yet upset the long-term inflation outlook.

But there is more disagreement than ever within the Fed and a shift in the FOMC; because more members say there should be no indication from the agency that the bias towards rate cuts continues. Chairman Powell also said he has no intention of stepping down as Fed governor even when his term as chairman ends, further complicating the already charged political climate at the Fed.

This environment could make the bond market more sensitive and inflation remains above target, with the latest personal consumption expenditures index hovering around 3.5% annually. Core PCE increased to 3.2%.

Referring to the target of maximum employment and 2% inflation for the economy, Nardini said, “If we remember the role of the Fed, we have a dual mandate and it is data-based. So on one side of the spectrum there is employment and on the other side there is inflation.” he said. “Oftentimes we forget about bonds in a portfolio until they become prominent and it is too late to adjust your portfolio or react accordingly,” he said.

There is reason to believe that more investors may have chosen to ignore bonds during Powell’s tenure at the Fed: they performed so poorly. Bloomberg US Aggregate Bond Index It aims to track the entirety of U.S. investment-grade debt, which returned just under 2% annually during Powell’s tenure, according to Bespoke; This is well below the 6.5% average since the 1970s. The period when interest rates rose due to inflation caused many shocks, from Covid to Russia’s invasion of Ukraine and the current US-Iran war.

Nardini said the Fed is currently in standby mode and the first big risk for bond investors is duration. If investors have loaded up on longer-dated bonds and are expecting cuts, they could be vulnerable if they arrive late or not at all. 10 years treasure It has already experienced sharp volatility this year, as its current yield is above 4%.

The second risk is credit strength. Corporate spreads remain relatively tight, Nardini says, meaning investors aren’t paid significantly more for taking on additional risk in bonds beyond the risk-free treasury rate. This dynamic could become more important late in the cycle if economic weakness and credit weakness increase. “You really have to examine how much of the loan yield comes from treasuries and how much of the spread component is,” he said.

The historically tight levels of credit spreads and recently testing multi-decade lows represent belief among investors that default risk is low and the economic outlook is strong. But at the same time, despite the Fed being put on hold, markets increasing bets this year yield curve Long-term interest rates will steepen as short-term interest rates remain more sensitive to an eventual Fed cut, while long-term interest rates face expectations of sticky inflation and higher public debt, a concern implicit in warnings like Dimon’s.

Nardini says it’s important to remember that during periods of relative calm, calm can be deceiving. “Anytime markets get complacent, whether it’s in stocks or bonds, that’s usually when volatility sets in,” he said.

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