Dimon warns on stocks and long bonds as ETF flows favor short Treasurys

JPMorgan Chase Chief Executive Jamie Dimon has cautioned that investors may be giving too little weight to risks in equities while also saying he would avoid long-maturity U.S. government debt, according to comments to CNBC. ETFAction data cited by CNBC show investors have already moved heavily toward the short end of the Treasury market, with the iShares 0-3 Month Treasury Bond ETF drawing $47.5 billion in net inflows this year.

The flows point to a split in investor behavior. Equity exchange-traded funds have continued to attract large sums, while fixed-income demand has concentrated in instruments with limited exposure to longer-term interest-rate moves.

Dimon told CNBC contributor Wilfred Frost on Monday that stock valuations were at levels he would not buy. He also said he would not purchase long-dated Treasurys, adding: “The 10-year bond should probably be at 4% to 4.5%.”

The 10-year Treasury yield is currently 4.6%, CNBC reported. Yields have risen for much of the year as market expectations shifted from eventual Federal Reserve rate cuts toward the possibility that a rate increase may be more likely, according to the CME FedWatch Tool cited by CNBC.

Short duration draws the bond money

The iShares 0-3 Month Treasury Bond ETF, which trades under the ticker SGOV, has taken in more money this year than any other bond ETF, according to ETFAction.com figures cited by CNBC. The fund now has close to $100 billion in assets, making it the third-largest bond ETF behind the Vanguard Total Bond Market ETF and the iShares Core U.S. Aggregate Bond ETF.

Short-dated Treasury funds hold bills and other securities near maturity. Because their holdings mature quickly, their prices are generally less sensitive to changes in longer-term yields than funds that hold 10-year or longer obligations. Investors still face reinvestment risk if short-term rates fall, but they take less duration risk than in long-bond funds.

That distinction matters when the yield curve is under pressure from inflation uncertainty and fiscal concerns. Bond prices move in the opposite direction from yields, so a rise in 10-year yields weighs on the market value of longer-dated Treasurys. CNBC reported that uncertainty over inflation, the risk of tighter monetary policy and concerns about public spending and deficits have contributed to pressure on longer maturities.

Equity inflows remain strong

The move into short-term Treasurys has not meant a retreat from equities. CNBC reported that investors have continued to add record sums to equity ETFs, citing ETFGI data showing the U.S. ETF industry reached a record level at the midyear point and that equity ETFs accounted for almost half of the total.

Over the past year, only two fixed-income ETFs ranked among the 10 largest ETFs by flows, according to ETFAction data cited by CNBC: Vanguard Total Bond Market ETF and SGOV. The short-term Treasury fund ranked fifth among all ETFs by flows over that period, behind major broad equity funds from Vanguard, iShares and State Street, including core S&P 500 products and the Vanguard Total Stock Market ETF.

The same pattern continued into the summer. SGOV also ranked fifth among all ETFs for inflows in June, according to the ETFAction data cited by CNBC.

The use of short-term Treasurys as a stabilizing allocation has a long precedent among prominent investors. Warren Buffett wrote in Berkshire Hathaway’s 2013 annual letter that his estate plan for his wife called for 90% in an S&P 500 index fund and 10% in short-term government bonds, according to the letter.

This story draws on original reporting from CNBC.