Ray Dalio is warning that rising bond yields could eventually undermine equities as earnings growth loses its ability to offset increasingly attractive returns from fixed-income investments.
The Bridgewater Associates founder said that stocks have remained resilient despite higher yields because earnings growth has maintained a favorable expected-return gap compared with bonds. However, rising stock prices and bond yields are eroding equities’ relative appeal, leaving them less able to withstand higher interest rates, said Dalio as he discussed the outlook with CNBC on Thursday at the Milken Institute Asia Summit in Singapore.
"Because of that change in pricing, that cushion has come down, and so now you’re starting to see credit spreads start to widen,” Dalio said.
He expects borrowing needs to stay elevated as governments fund fiscal deficits and companies invest in emerging technologies, potentially adding further upward pressure on interest rates.
"We are in a bond bear market, that’s I think, pretty clear, and I think that there’s more to go would be my guess," Dalio warned.
He also cautioned that higher borrowing costs could eventually restrict credit and consumer spending, slowing economic activity and creating additional pressure on stock markets.
Deteriorating Cash Flow Warning
Ray Dalio warned that corporate free cash flow could be “deteriorating” even as earnings improve, urging investors to look beyond headline profits.
He cautioned that companies investing heavily without generating sufficient cash could face liquidity pressures, but stopped short of predicting an earnings decline or an imminent market correction, noting that financial conditions have not tightened enough to significantly curb credit and spending.
Dalio Flags Rising Treasury Yield Risks
Dalio’s latest warning came as the benchmark 10-year Treasury note yield surged to its highest level since April 2002 this week before dropping to 5.229% on Thursday. At the same time, the 30-year Treasury bond yield fell to 5.602% following a recent 24-year high.
It follows his August call for investors to reduce long-duration bond exposure and consider allocating 10% to 15% of portfolios to gold, alongside a smaller Bitcoin (CRYPTO: BTC) position. At the time, Dalio said a U.S. debt crisis could emerge in roughly three years, "give or take two," if policymakers failed to reduce the fiscal deficit.
Earlier this month, he identified another pressure point for the Treasury market, saying China is reducing its U.S. debt accumulation while Japan seeks to recover funds it has lent Washington. Dalio warned that foreign investors, who fund nearly a third of U.S. borrowing, could drive Treasury yields higher if they reduce purchases amid heavy government debt issuance.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
Photo courtesy: Shutterstock
Login to comment