Dalio Says the Bond Bear Market Has a Long Way to Go
Ray Dalio wrote on Tuesday that the US has entered a phase in which an expanding supply of bonds pushes yields higher, which raises borrowing costs and adds further to the debt. In his view the cycle is unlikely to end until higher rates weaken the economy and markets enough to bring supply and demand back into balance. The bond bear market, he wrote, probably has a long way to go.
Per Bloomberg, Ye Xie reports that Dalio puts the US debt burden, measured by total borrowing and debt service relative to government revenue, at its highest since the Second World War and expects it to worsen. The Treasury is due to roll over about $10 trillion of maturing debt this year while adding $2.1 trillion in new borrowing. With that much coming due, Dalio argues, even a modest decline in investors' willingness to reinvest maturing proceeds could open a significant funding gap.
The risk he identifies is on the demand side. Some of the largest foreign holders may reduce their appetite. Japanese authorities have reason to encourage domestic investors to bring home part of their $1.1 trillion in Treasuries to support the yen and the local bond market, and rising Japanese yields make that more attractive. The Treasury is also competing with corporations raising debt and equity to fund the AI buildout. Dalio points to investors demanding larger concessions to absorb that supply and calls the corporate credit market the canary in the coal mine. His conclusion is that expected supply and demand have long made it easier to be short Treasuries than long.
The other side of the argument has support. BlackRock and Morgan Stanley Investment Management have turned more positive on Treasuries after the 10-year yield approached 5.4% this month, the highest in nearly 25 years. At those levels, buyers seeking to lock in income have begun to appear, and recent 10-year and 30-year auctions drew solid demand. The Bloomberg Treasury index is down about 2.4% this year and on course for its first annual loss since 2022.
The chart behind the argument is interest expense. Federal interest payments have risen to roughly 3% of GDP, matching the peaks of the early 1990s, and they are still climbing because much of the debt was issued at lower rates and reprices as it rolls. Every buyer the Treasury loses has to be replaced by another at a higher yield, and every increase in yield adds to the interest bill that requires the next round of issuance. That feedback loop is the mechanism Dalio describes, and the policy responses on offer this year, from larger buybacks to discussion of trimming 20-year and 30-year supply in favour of bills, manage where the debt sits on the curve rather than how much of it there is.
What to watch is foreign demand at auctions and the Treasury's November 4 refunding statement. Dalio's argument depends on demand weakening at the margin. If auctions keep clearing at these yields, the bulls have a case. If indirect bidding softens while issuance rises, the gap he describes begins to show up in the data.