Famed hedge funder Ray Dalio, founder of Bridgewater Associates LP, has warned about mounting risks related to U.S. Treasuries. He urges that those risks may be higher than what credit rating agencies such as Moody’s may lead you to believe. His remarks come on the heels of Moody’s recent downgrade of the U.S. credit rating. This decision has already set off market reactions, landing a 14 basis point increase in Treasury yields and a 3.4 percent decline in U.S. stocks.
Moody’s downgrade has thrown a storm of uncertainty across the financial markets. This action comes on the heels of similar announcements from the other two major credit agencies. Specifically, the 30-year Treasury bond yield jumped to 4.995%, and the 10-year note yield jumped to 4.521%. That spike is a measure of investors’ fears about the long-term prospects for U.S. government debt. On Monday, a day after the downgrade announcement, U.S. stocks suffered their biggest one-day drop in months.
Bridgewater Associates, of Greenwich, Connecticut—once the world’s largest hedge fund—suffered an 18% year-over-year decline in assets under management in 2024. This decline cut their total to roughly $92 billion. This is a huge drop from the $150 billion we saw back in 2021. Famed for its long-standing reputation in macroeconomic investment strategies, the firm further grapples with growing pains as it navigates through an increasingly digital financial landscape.
To argue against the idea, Dalio took to social media platform X to share his opinion on the topic. He continued to underline the point that credit ratings are an incomplete measure of the risk of the burden of government debt.
“You should know that credit ratings understate credit risks because they only rate the risk of the government not paying its debt,” – Ray Dalio
He expanded on this idea further during his keynote remarks at the opening session of the Greenwich Economic Forum on October 3, 2023. According to Dalio, the purpose of rating agencies should be to judge the probability of default. They often overlook other risks that threaten to materialize and hurt bondholders.
“Said differently, for those who care about the value of their money, the risks for U.S. government debt are greater than the rating agencies are conveying,” – Ray Dalio
He additionally cautioned against the risk of governments having to turn to central banks to print money in order to meet their debts. Such measures would risk hyperinflation, devaluation of currency and have a negative effect on bondholders.
“They don’t include the greater risk that the countries in debt will print money to pay their debts thus causing holders of the bonds to suffer losses from the decreased value of the money they’re getting (rather than from the decreased quantity of money they’re getting),” – Ray Dalio
Investors and institutions alike are quickly recalibrating to these newfound realities. Dalio’s wisdom serves to highlight just how complicated the situation is with respect to U.S. government debt and its contributions to financial markets.