JPMorgan Chase CEO Jamie Dimon Just Warned Investors of a Potential Debt Crisis. Here’s What Investors Should Do.

Speaking at a conference in Norway earlier this week, Jamie Dimon, the iconic CEO of investment bank JPMorgan Chase, said there could be a bond crisis if rising levels of government debt worldwide are not addressed soon.

“The way it’s going now, there will be some kind of bond crisis, and then we’ll have to deal with it,” Dimon told attendees at the conference.

Generally, a bond crisis occurs when investors lose confidence in government bonds and begin selling them in large quantities, sending bond prices down and yields — which move in the opposite direction of prices — suddenly higher.

A sudden spike in bond yields can be damaging in many ways. Governments suddenly have to pay more in interest to raise money, borrowing costs for households and businesses rise, existing bondholders lose money on their holdings, and corporate earnings decline, ultimately sending share prices lower.

Certainly, bond yields can rise as expectations of economic growth improve. And generally, that’s a good thing for bond and stock investors.

But that’s not what Dimon was talking about. Because the U.S. government continues to spend more every year than it takes in from taxes and other revenue, its overall debt continues to rise. It now stands at around $39.2 trillion, or about 124% of gross domestic product (GDP).

And the U.S. is hardly unique. Many advanced economies carry large debt loads. Japan’s debt is more than 235% of GDP, and several large European nations have debt that exceeds 100% of GDP (Italy’s stands at 135%).

At some point, Dimon suggests (and he’s not alone), bond investors will balk at lending more money to these governments to fund their annual budget deficits. They will either stop buying their bonds or, more likely, demand higher yields to do so, sending borrowing costs higher across the board and threatening market liquidity, among other things.

Nobody knows exactly when that will happen, but Dimon and other suggest that time is getting closer. “That die may have been cast,” Dimon said at the conference. “It just hasn’t happened yet.”

Investors can protect themselves to some extent from a bond crisis

The question is, what should investors do to protect themselves from a bond crisis?

Well, it’s probably not wise to overhaul your entire portfolio in anticipation of a looming debt crisis. Such an event is difficult to predict, and an overly fearful response could cause an investor to miss out on significant market gains before it happens.

But making a few small changes and/or additions to your portfolio can make it more resilient to a broad sell-off in the bond market.

First, if you own bonds, consider reducing the duration of your current bond portfolio. Shorter maturity bonds tend to withstand sudden yield spikes better.

Treasury Inflation-Protected Securities, or TIPS, and Series I Savings bonds can help protect your portfolio from inflation — which often goes hand-in-hand with rising debt. So adding them to your current portfolio is a wise idea.

Also, if you fear a U.S. debt crisis in particular, consider both high-quality corporate bonds and non-U.S. bonds. Bond giant PIMCO recommends bonds issued by the United Kingdom and Australia, which it says are high-quality sovereign bond issuers with stronger fiscal health than the U.S.

As for stocks, increase your investments in high-quality companies with strong balance sheets and quality cash flow. Avoid, or at least reduce, investments in highly indebted companies. Defensive stocks like utilities and consumer staples tend to hold up well in a variety of economic crises.

Finally, some investment advisors recommend gold as a hedge in times of crisis. I also believe that allocating a small portion of your portfolio to precious metals is wise. And if global investors — in particular, central banks — decide to reduce their purchase of Treasury securities, they will rely more heavily on gold for their monetary reserves, sending its price higher.

JPMorgan Chase is an advertising partner of Motley Fool Money. Matthew Benjamin has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.