US Billionaire investor Ray Dalio warned the US bond selloff is far from over as surging government and corporate borrowing meets fading demand from some of the world's biggest traditional buyers.
The founder of Bridgewater Associates, one of the world's largest hedge funds, said on social media, the US is entering a stage where more bonds drive up higher yields, raising borrowing costs, widening deficits and leading to even more debt.
The "death spiral" is unlikely to end until higher rates weaken the economy and markets enough to bring supply and demand back into a balanced sustainable level, he said.
"The bond bear market probably has a long way to go," he wrote. "And we should be alerted to the other markets' possible weakness."
Dalio estimated the US debt burden, measured by total borrowings and bond-service costs relative to government revenue, has reached the highest since World War II and is set to worsen in coming years.
The government is expected to roll over about US$10 trillion of maturing obligations this year, and needs US$2.1 trillion of additional financing, according to Dalio. With so much coming due, even a modest decline in investors' willingness to reinvest the proceeds could create a significant funding gap, he warned.
He noted China and Japan, which are two of the largest beneficial holders of US Treasuries, are the most important holders to watch because their incentives have shifted from accumulating to reducing their holdings of that debt.
Japanese policy makers, for example, have an incentive to encourage domestic investors to reduce their US$1.1 trillion of US Treasuries holdings and repatriate capital to support the yen and the local bond market, Dalio said, adding that rising Japanese yields would encourage that shift.
However, his bearish stance contrasts with some investors and strategists, including those at BlackRock and Morgan Stanley, who have turned bullish after 10-year Treasury yields surged to the highest in nearly a quarter century this month, approaching 5.4 percent.
