Jamie Dimon Puts 7% and Stagflation on the Table

Jamie Dimon, the longtime CEO of JPMorgan Chase, said earlier this week that the world is not ready for 7% short-term interest rates. 

With Treasury bills and the fed-funds rate in the 5.5% range, the implication from Mr. Dimon is that the first 11 rate hikes from the Federal Reserve have had some impact on consumer and the markets, but that the worst damage would come from another 1 percentage point or so to the upside. It is hard to disagree with that. 

For investment advisors, this is not only an issue to consider, but one of many possibilities to prepare for. Like with a fire drill, there may not be an actual fire, but you don’t want to start preparing when the alarm rings for real. 

Technical targets for the 10-year U.S. Treasury can potentially be as high as 5.3% and even 6.8% during this cycle, versus the current 4.55% rate. Those aren't projections or predictions, just part of the strategist’s “war games” that include considering a wide range of possible outcomes. 

Jamie Dimon Takes a Stand

That’s what Jamie Dimon seems to be doing, and he should be applauded for doing what not all CEOs or investment managers do: saying it out loud, before it happens. Even if the market broadly disagrees at this stage of the cycle.

For investment advisors and their clients, and for self-directed investors, the key to considering the higher rate scenario isn't what will happen. It is to be prepared for whatever happens. Or, to quote one of Taylor Swift’s many hit songs, the message to advisors is, “Are You Ready?” 

“Higher for longer” is a popular Wall Street narrative, which many interpret casually as rates staying where they are for a while and not dropping soon. Dimon’s suggestion is from someone who sits in the catbird’s seat of Wall Street, and so it is worthy of considering as one of those many scenarios for the market cycle. Here are a few ways to guard against runaway rates in ETF form. 

ETFs to Consider

Ironically, this past week saw a lot of “bottom fishers” in the bond market, even while rates continued higher and prices lower. As reported on etf.com, inflows into the largest unlevered long-term Treasury bond ETF, the iShares 20+ Year Treasury Bond ETF (TLT) have surged. TLT would likely suffer additional, serious damage to its total return if rates moved up toward 7%. In that case, investors would want to be familiar with a much smaller ETF that is essentially the opposite of TLT, the $194 million in assets ProShares Short 20+ Year Treasury (TBF). Its 13.6% gain this year versus an 8.5% loss for TLT reflects the inverse and slightly leveraged nature of TBF. 

While TBF is a somewhat straightforward instrument to try to hedge or profit from rising rates, those who want to consider and ETF with some additional features can research the Invesco Variable Rate Preferred ETF (VRP). This $1.46 billion fund has a track record of more than nine years and is up 5.2% this year. 

VRP combines two types of bonds (floating rate preferred and variable rate preferred) that each have the same characteristic. Their interest rate is not fixed, it floats. So, higher bond market rates are expected to lead to a higher rate for VRP. However, investors considering VRP should also note that it carries some credit risk. 62% of its current holdings carry a BBB rating, 32% are rated B, and the rest are lower rated or unrated securities. 

JPMorgan’s CEO carries a lot of weight on Wall Street. And this week, he essentially said there’s something worse than higher for longer—much higher for much longer!—the ETF industry has advisors prepared for that scenario, if it happens.