While the benchmark 10-year Treasury yield slipped to 2.934 today, 5% yields are not beyond the realm of possibilities in the government debt space, according to JPMorgan Chase CEO Jamie Dimon.
“I think rates should be 4 percent today,” said Dimon. “You better be prepared to deal with rates 5 percent or higher — it’s a higher probability than most people think.”
In addition to the benchmark Treasury 10- year yield, the 30-year yield also edged lower to 3.077 as of 2:45 p.m. ET. The 5-year yield ticked lower to 2.802 while the 2-year yield notched higher to 2.649.
Not since 2006 has Treasury yields reached the 5% mark. Of course, that served as a precursor to the financial crisis that would occur in 2008.
Dimon’s prediction also hints at a robust economy, especially with the Commerce Department announcing a 4.1% increase in GDP during the second quarter, which was spurned by a mix of tax cuts, deregulation and spending increases. The Fed expects GDP to rise 2.8 percent for 2018 in the aggregate, but diminish to 2.4 percent in 2019 followed by 2 percent in 2020.
Related: Possible Carnage in the Bond Market
Furthermore, the prevailing notion in the capital markets is that Federal Reserve Chair Jerome Powell and the FOMC are set to raise interest rates two more times through 2018.
Investment-Grade Fixed Income ETFs Rise
In addition to rising government debt yields, Dimon also made mention of business sentiment residing at its highest levels in addition to consumer sentiment.
“Business sentiment is almost at the highest level it’s ever been, consumer sentiment is at its highest levels, markets are wide open, housing’s in short supply and my guess is mortgage credit will expand a little bit,” Dimon told CNBC in June. “If you look at how the table’s set, consumers are in very good shape.”
If Dimon’s comments corroborate with the fixed-income ETFs focusing on corporate bonds, then investors should take advantage of the opportunities, particularly in ETFs with investment-grade debt issues like the iShares Intermediate Credit Bond ETF (NASDAQ: CIU) and iShares iBoxx $ Invmt Grade Corp Bd ETF (NYSEArca: LQD. Both ETFs were up today–0.16% and 0.14%, respectively.
CIU seeks to track the investment results of the Bloomberg Barclays U.S. Intermediate Credit Bond Index. The ETF’s focus is on investment-grade corporate debt and sovereign, supranational, local authority and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to ten years.
LQD seeks to track the investment results of the Markit iBoxx® USD Liquid Investment Grade Index composed of U.S. dollar-denominated, investment-grade corporate bonds. LQD allocates 95 percent of its total assets in investment-grade corporate bonds to mitigate credit risk during times of a recession.
For more trends in fixed income, visit the Fixed Income Channel.