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Ray Dalio warns that rising bond yields could eventually hurt stocks, as profit growth loses its ability to offset increasingly attractive returns on fixed-income investments.
THE Bridgewater Associates The founder said stocks have remained resilient despite higher yields because earnings growth has maintained a favorable expected return gap versus bonds. However, rising stock prices and bond yields are eroding the relative attractiveness of stocks, making them less able to withstand higher interest rates, Dalio said during his interview with CNBC Thursday at the Milken Institute Asia Summit in Singapore.
“Because of this price change, that cushion has diminished, and now you’re starting to see credit spreads start to widen,” Dalio said.
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He expects borrowing needs to remain high as governments finance budget deficits and companies invest in emerging technologies, which could increase upward pressure on interest rates.
“We’re in a bear bond market, that’s pretty clear, I think, and I think there’s still a lot to do, in my opinion,” Dalio warned.
He also warned that higher borrowing costs could ultimately restrict credit and consumer spending, slowing economic activity and creating additional pressure on stock markets.
Cash flow deterioration warning
Ray Dalio has warned that companies’ free cash flow could “deteriorate” even if profits improve, urging investors to look beyond headline profits.
He warned that companies that invest heavily without generating enough cash could face liquidity pressures, but he did not predict a drop in profits or an imminent market correction, noting that financial conditions have not tightened enough to significantly curb credit and spending.
See also: Avoid Investing Mistake #1: How Your “Safe” Assets Could Cost You
Dalio Signals Rising Risks to Treasury Yields
Dalio’s latest warning came as the benchmark 10-year Treasury yield rose to its highest level since April 2002 this week before falling to 5.229% on Thursday. At the same time, the yield on the 30-year Treasury note fell to 5.602% from a recent 24-year high.
This follows his August call for investors to reduce exposure to long-duration bonds and consider allocating 10-15% of their portfolios to gold, alongside a smaller proportion of gold. Bitcoin position. At the time, Dalio said a U.S. debt crisis could erupt in about three years, “give or take two,” if policymakers fail to reduce the budget deficit.
Earlier this month, he identified another pressure point for the Treasury market, saying China was reducing its U.S. debt buildup while Japan sought to recoup funds it had lent to Washington. Dalio warned that foreign investors, who fund nearly a third of U.S. borrowing, could push up Treasury yields if they reduce their purchases amid massive issuance of government debt.
Photo courtesy: Shutterstock
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