Ray Dalio: Surging US Debt Makes Chinese Bonds More Attractive to Investors

Over the past decade, US debt levels have been on an alarming trajectory, which has only accelerated since the beginning of the pandemic. As a result, US bond issuances have skyrocketed in order to pay for the trillions of dollars in government emergency funding, with volumes projected to hit $4 trillion in 2021, according to ING. In the meantime, bond yields have surged to new highs, with the benchmark 10-year note rising above 1.6% within the last several weeks.

However, according to Bridgewater Associates founder Ray Dalio, investing in bonds— especially during a time of extensive over-borrowing by the US government— is “stupid.” In a LinkedIn post, Dalio suggests the world owns too many bonds, which become an even poorer investment once inflation is factored in. He warns that governments facing declining revenues may raise taxes, which in turn would push capital out of debt assets, and ultimately curb against capital movements into other assets such as Bitcoin and gold.

Instead, Dalio diverts attention to Chinese bonds, which have shown significant stability relative to their US counterparts. The strength of China’s economy has prompted investors to begin buying Chinese bonds in leu of US Treasurys, which he suggests is part of a historic cycle where the capital markets of an emerging empire threaten the existing superpower. According to him, the relative economic positions of China and the US are inconsistent with central bank and international investor bond portfolios, which currently hold over one-third of US Treasurys and only 6% of Chinese bonds.

“Their overweighted position in U.S. bonds is largely because of the ‘exorbitant privilege’ the U.S. has had being the world’s leading reserve currency, which has allowed the U.S. to overborrow for decades,” Dalio wrote in his LinkedIn post. “As part of this cycle, there is the emergence of the currency and capital markets of the rising and competing empire. Consistent with this classic cycle there is now a shifting from U.S. bonds to Chinese bonds going on,” he continued.

The founder of the world’s largest hedge fund previously raised alarm over the impact of large deficits on the US dollar’s reserve currency status. He instead advocates for the diversification of portfolios away from assets that are heavily skewed to US dollars, and into non-debt and non-dollar assets.

Information for this briefing was found via LinkedIn. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.