Bridgewater founder Ray Dalio warns of danger of US debt to Treasury market

Ray Dalio, the billionaire founder of hedge fund giant Bridgewater Associates, has warned that the US government’s rising debt levels could hit Treasury bonds, arguing that investors should move some of their money to foreign markets.

In an interview with the Financial Times, Dalio described his wide-ranging concerns about the US, including its debt load, the risk of what he calls a “civil war” and the potential for the country to become involved in another international conflict, which he warned could deter foreign investors from buying US bonds.

“I am . . . concerned about Treasury bonds because of the high debt levels, which high interest rates are adding to,” he said.

“I’m also concerned about the softening demand to meet supply, particularly from international buyers worried about the US debt picture and possible sanctions,” Dalio said. If the US were to impose sanctions on more countries — after doing so against Russia following its invasion of Ukraine — then that could reduce international demand for Treasuries, he added.

Dalio’s warnings come amid growing concern among some commentators about the US’s debt pile. The Congressional Budget Office forecasts US debt-to-GDP will rise above its second world war high of 106 per cent by the end of the decade and keep rising, while the watchdog’s director has warned of a Liz Truss-style market shock if the federal deficit is ignored.

Federal Reserve chair Jay Powell said “the US is on an unsustainable fiscal path” with regards to its debt in an interview with the news programme 60 Minutes earlier this year.

Meanwhile, borrowing costs have climbed this year, with yields on 10-year Treasuries jumping from 3.88 per cent to 4.35 per cent as investors drastically scale back their expectations of interest rate cuts.

However, some investors believe such concerns are overblown. They argue the flood of new Treasury debt on offer this year has largely been well absorbed by private investors, with larger auction sizes so far having little effect on yields.

Because of the US’s debt and the potential impact of further conflict, Dalio said investors should look to move some of their money outside the country.

Although “the best parts of the United States are still the best parts of the world for capitalism and innovation”, the risks the country faced were on the rise and make geographic diversification necessary, he said.

“Countries that earn more than they spend and have great balance sheets, have internal order and are neutral in the geopolitical conflicts . . . look attractive,” Dalio added.

He identified countries such as India, Singapore, Indonesia, Malaysia, Vietnam and some Gulf states as potentially attractive destinations to invest. He added that gold was also a good diversifier.

Dalio, 74, stepped down as chair of Connecticut-based Bridgewater, which is the world’s largest hedge fund and manages $112.5bn in assets, in 2021. He remains an adviser to the three co-chief investment officers and is a member of the board, while his research, supported by a team at Bridgewater, is shared with investors.

Among the risks identified by his research is what Dalio believes is the growing likelihood of a US “civil war” — the probability of which he puts at somewhere between 35-40 per cent. 

“We are now on the brink,” he said. But we “don’t yet know if we will cross over into much more turbulent times”.

The civil war Dalio imagines was not necessarily one in which people “grab guns and start shooting”, although such a scenario was possible, he said.

Instead he sees it as an acceleration of the political polarisation in American politics that has taken place in recent decades. This civil war would be one in which “people move to different states that are more aligned with what they want and they don’t follow the decisions of federal authorities of the opposite political persuasion”.

He also believes this year’s US presidential election is the most important one in his lifetime and will determine whether the risks he sees — which also include climate change and the impact of the more widespread use of artificial intelligence — will spiral out of control.

This election would be a test of “can democracy work well? Will there be an acceptance of the rules and an ability to work well under those rules?” he said.

“[Republican candidate Donald] Trump will follow more rightist, nationalistic, isolationist, protectionist, non-regulatory policies — and more aggressive policies to fight enemies internally and externally, including political enemies. [President Joe] Biden, and even more so the Democratic party without Biden, will be more the opposite, though they too will play political hardball,” he added. 

Dalio declined to back a candidate, but did reveal that he recently attended a Taylor Swift concert.

“I saw how she brought people of all sorts — and many nationalities — together. It felt like it would have been impossible to fight,” he explained. “I say this partly as a joke, but if she ran for president and would listen to great advisers, I’d consider supporting her.”