Bond Market Massacre Ahead: Financial Repression in the Land of the Free
Or Swan Song of the Long Tenors
London, 3 June 2025. Today it all seems quiet on the bond front. Yields are down, bond prices have been rising, all seems well. But is it? The VIX is on the rise…
In July 2007, the CEO of Citigroup Inc., Chuck Prince, told the Financial Times that global liquidity was enormous and all was well. "As long as the music is playing, you've got to get up and dance," he said. "We're still dancing.”
Are the tenors still singing in the bond markets? Singing, while Rome burns?
Only last Friday, 30 May, Jamie Dimon, chief executive of J. P. Morgan Chase, the world’s fifth largest bank by assets (trailing 4 Chinese banks in the rankings), warned regulators and market participants that the US bond market was going to be a cause for “panic”. Dimon spoke at the inaugural Reagan National Economic Forum, held at the Ronald Reagan Presidential Library in Simi Valley, California.
The bond market is on edge, most commentators would agree.
Jamie Dimon predicted:
“You are going to see a crack in the bond market”.
And: “You are going to panic”.
Indeed, 10-year US Treasuries were traded at yields of 4.4% and 30-year Treasuries at yields of 4.9%. These figures are lower than at the peak of the recent bond scare, on Wednesday, 19 May, when the 30-year Treasuries recorded a yield of 5.09% and the 20-year Treasuries 5.12%, respectively. These yields rose even higher temporarily on the following day, after a failed Japanese government bond auction in Tokyo, within reach of 5.2%, although they settled at a lower rate by the end of the trading day.
Dimon fired off two warnings: One about the shaky state of bond markets, aimed at all investors, and another specifically aimed at US regulators: He argued that a proposed change in US bank regulations, namely a loosening of banks’ supplementary leverage ratio (SLR), was not a good idea.
That may seem surprising, since a bank like JP Morgan would likely prefer a loosening of bank regulations.
The specific change in banks’ regulatory requirements had been discussed by Treasury Secretary Scott Bessent. The SLR imposes a restriction on banks’ balance sheet growth and the US Treasury Secretary raised the prospect of loosening this regulation for banks in case they held US Treasuries. Presently, large US banks must hold equity capital against all assets, whether mortgages or “high-quality assets” like US Treasuries. The leverage ratio is an absolute limit to banks’ balance sheet growth, at any given amount of capital. So loosening the supplementary leverage ratio means that banks can grow their balance sheets virtually without limit, as long as they pile into US Treasuries. Therefore some may consider this as a way to encourage the banking sector to grow, and hence the economy to benefit.
By excluding Treasuries from this ratio it would henceforth give banks powerful incentives to buy US Treasuries. Unfortunately, the logic behind this measure is not a sudden insight that bank credit creation for the real economy is a necessary and sufficient condition for economic growth and that my proposal for backing fiscal policy with bank credit-based monetary policy (what I call Enhanced Debt Management) should be implemented. Instead, it is more like a stop-gap measure designed to boost the bond market by nudging banks to buy bonds, thus placing a lid on potential bond yield rises, and perhaps even pushing yields lower – something President Donald Trump had been keen to achieve since he had taken office again in January. Today it looks like just talk about it is already having an effect.
A bond market massacre, and only losers?
