The market’s heavy hitters are sounding the alarm about US debt

By | September 17, 2023

Bridgewater founder Ray Dalio gestures in front of a gray background.

Bridgewater founder Ray Dalio.Brendan McDermid/File photo/Reuters

  • Three market experts expressed concern that growing US debt could push up interest rates.

  • Ray Dalio and Bill Gross have both highlighted a supply-demand imbalance that will continue to fuel borrowing costs.

  • The supply of US debt will only grow as a recession would widen the federal deficit, Jeffrey Gundlach added.

US debt is ballooning and leading market experts are sounding warning signs, with more red ink on the way and a potential recession looming.

The warnings come as federal deficits have exploded in recent years, dramatically raising the trajectory of U.S. debt. The Treasury Department has already auctioned off $1 trillion in bonds just this quarter. Meanwhile, borrowing costs have soared over the past year and a half as the Federal Reserve has embarked on an aggressive tightening campaign.

Last week, Wall Street giants Ray Dalio, Bill Gross and Jeffrey Gundlach weighed in:

Ray Dalio

The founder of Bridgewater Associates said he won’t invest in bonds and, instead, touted liquidity as a good thing, for now.

Speaking at the Milken Institute Asia Summit in Singapore, Dalio explained that the growing fiscal deficit is forcing the Treasury Department to continue issuing bonds.

But the increase in the supply of new US debt is not the only problem. If investors don’t receive a high enough real interest rate, they will sell their bonds, he warned.

“Supply-demand [imbalance] it’s not just the quantity of new bonds. The question is “do you choose to sell the bonds?” I personally believe that long-term bonds are not a good investment,” Dalio said during Thursday’s event.

While interest rate increases would help spur demand for bonds, they make servicing the debt more expensive.

“When interest rates go up, the central bank has to make a choice: let them go up and have the consequences of that, or then print money and buy those bonds? And that has inflationary consequences,” Dalio said. “So, we’re seeing that dynamic happen now.”

Bill Gross

The “bond king” who led Pimco’s fixed income success had similar concerns about the debt market.

In an interview with Bloomberg’s Odd Lots podcast, he noted that a third of outstanding U.S. debt is set to mature in less than a year. To ensure the Treasury can meet this goal, it will need to attract a broad swath of buyers.

Again, this is based on rising interest rates.

Gross noted that the Fed’s quantitative tightening campaign worsens the supply-demand imbalance, as it eliminates the central bank as a bond buyer. And the lack of demand means Treasury bond prices remain low, he warned.

“It’s precarious at some point,” he said. “I’m not saying get out. I’m just saying assets have to go up, otherwise the economy won’t do well.”

Jeffrey Gundlach

Similarly titled the “bond king,” Gundlach expects a surge in Treasury bonds, warning that an impending recession will deepen the federal deficit.

“The thing that will confuse people the most is that once the recession gets deeper, bond yields will actually start to rise because of the excessive money printing and monetary response,” he told Fox Business.

While many economists are excited about the prospect of a soft landing, Gundlach says a recession is likely in six to eight months as consumers’ pandemic-era savings are depleted.

If that happened in the context of the Fed’s restrictive policy, the economy could tip into deflation, he predicted, forcing the government into further debt.

“I think the Fed, in the back of its mind, realizes that when the next recession comes, the amount of lending will be so enormous that it will be a really bad idea to have interest rates above 5%,” he said.

Read the original article on Business Insider

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