Jamie Dimon recently shared his thoughts on the bond market. He noted a ‘crack’ during COVID-19 and highlighted that US government debt has risen by $10 trillion since then. He predicts there will be another crack in the bond market, which could lead to panic, but he feels his organization will handle it well. Dimon mentioned that changes to rules and regulations may be needed but did not specify when this crack might occur—whether in six months or six years. He observed that lessons from early COVID-19 events, when yields jumped just before the Federal Reserve began unlimited Quantitative Easing, may not have been learned. After ‘Liberation Day,’ yields increased by 70 basis points before stabilizing. The current strategy appears to involve selling bonds first. If this becomes widespread, it could put added pressure on bonds during any future market turmoil. Dimon’s comments highlight his ongoing worries about fragility in the bond market and reflect a broader trend we’ve seen since the pandemic. Government debt has increased, and the markets have absorbed it—so far—without major issues. However, this calm could change if stress returns. When Dimon refers to “another crack,” it’s serious. The earlier crack during the COVID-19 panic showed that Treasury markets stumbled not because of economic failure but due to structural pressures. There were no buyers amid the chaos, and yields soared until the Federal Reserve intervened with strong measures. This emergency liquidity was effective, but only for a while. Dimon’s vague timeframe—six months or six years—suggests that it’s not the exact timing that matters but rather the possibility of instability re-emerging once monetary and fiscal supports fade or get tested. When everyone tries to exit the market simultaneously, even stable markets can falter. The 70 basis point yield rise after ‘Liberation Day’—when markets were thought to be normalizing—was not irrational. It reflected how investor confidence relies on central bank actions. Bonds were quickly sold, prices dropped, and yields responded. Selling first and asking questions later may work again, creating a self-reinforcing cycle. For those of us using derivatives in these markets, we shouldn’t assume that recent calm guarantees stability. The memory of rapid market changes should stay with us. Large institutions may quickly sell assets if volatility spikes, and this alters how volatility spreads through the market. Don’t think that high government debt alone will create problems. Issues arise when confidence in the value or liquidity of those bonds is tested—be it by inflation, a sudden change in foreign demand, or policy errors. Any trigger doesn’t have to be dramatic. There’s also the risk that regulation, which Dimon hinted at but didn’t elaborate on, might take time to adapt. If the market faces stress and there aren’t sufficient preparations, tactical positioning will be crucial, even more so than policies under discussion. Markets don’t wait for legislative clarity. In this environment, we should focus on shorter time frames and careful positioning. Using tail hedges might be beneficial when fear is undervalued. When mispricing occurs, it tends to happen suddenly. We’re not predicting panic. But when experienced banking leaders speak about past liquidity events in stark terms, traders should pay attention. If their expectations change, it usually signals the start of a phase where untested assumptions about liquidity, spreads, and correlations begin to shift. Those assumptions, if ignored for too long, often snap back with the most force. Preparation isn’t about predicting the future but positioning for unexpected events that don’t announce themselves.

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