To Ray Dalio, buying bonds is “stupid.” The bond market worldwide is in a “bubble,” he declares. And fixed income pays too little to bother with, in his view.
A world awash in debt is headed for big problems, the head of hedge fund powerhouse Bridgewater Associates wrote in a LinkedIn essay. “As the amounts outstanding grow, the risks also grow,” he contended.
And given Washington’s big countercyclical spending, with President Joe Biden’s $1.9 trillion aid package the latest addition, the vast ocean of global debt will only get larger and more unmanageable, Dalio said. This is a stance that is taking hold in some corners of the financial realm.
The over-supply of debt around today, he complained, is not a safe thing for investors. “The world is a) substantially overweighted in bonds (and other financial assets, especially US bonds),” Dalio wrote, “at the same time that b) governments (especially the US) are producing enormous amounts more debt.”
Plus, he argued, inflation is steadily eroding bonds’ value, even though its rise is still muted. For investors, buying bonds in most major nations today, he admonished, “will be guaranteed to have a lot less buying power in the future.”
For Dalio, bond prices (which increase as yields drop) likely are close to their upper limits. A brutal selloff of the world’s enormous bond holdings—$75 trillion from the US alone—would really mess things up, he warned, entailing a vicious circle: “If bond prices fall significantly, that will produce significant losses for holders of them, which could encourage more selling.”
At the moment, he wrote, “Bond markets offer ridiculously low yields.” To be sure, the bond market doesn’t give investors much to get excited about. The Bloomberg Barclays US Aggregate bond index, or Agg, has lost 3.25% this year.
The 10-year Treasury has climbed to a (recent) perch of 1.62%, which is low by historical standards. China’s equivalent is a relatively lofty 3.3%. So investors are gradually shifting to Chinese bonds, Dalio said.
In the US, you always can buy junk bonds, which now yield an average 4.4%, not bad but not great—and they have higher default risk than other paper. In Europe and Japan, yields are negative.
Not everyone agrees with Dalio’s dour outlook for fixed income. Take Jeffrey Gundlach, head of DoubleLine Capital and a towering figure in the bond world. In a recent webcast, he said their yields will move up over time, but that time has not come. Ongoing Federal Reserve bond buying and possible attempts to head off hikes on the long end, called yield curve control, are powerful forces that could thwart any huge bond selloff.
Indeed, while some inflationary signs are around, as the economy opens up and expands again, an up-trend for yields seems logical. Nonetheless, deflationary forces such as technology and globalization remain strong.
Dalio’s prescription for investors is to have a diversified portfolio, with a lot in non-dollar assets (he also is a dollar bear) and focused on equities (hey, he’s a stock guy, primarily).