Key Takeaways
- • Ray Dalio, founder of Bridgewater Associates, says the global bond bear market has "more to go" as governments and companies compete for the same pool of capital.
- • Dalio says credit spreads are starting to widen, and that higher borrowing costs will eventually reduce credit availability and spending.
- • Stocks have so far absorbed rising rates because earnings growth and expected returns remain strong, but Dalio says the equity cushion versus bonds is shrinking.
- • Dalio urges investors to focus on free cash flow rather than headline earnings, warning that cash generation could weaken.
- • Dalio is skeptical that U.S. policymakers will reconcile their differences to reduce the country's debt load.
Summary
Ray Dalio, founder of Bridgewater Associates, says the global bond market remains in a bear market with potentially further downside ahead. In remarks reported by CNBC from the Milken Institute Asia Summit in Singapore, Dalio said the bond selloff is likely to continue as governments and companies compete for capital, and he described the bear market as "pretty clear."
Dalio argued that rising yields are beginning to filter through to credit markets. He said credit spreads are starting to widen and that higher borrowing costs will eventually reduce credit and spending across the economy. For now, however, he said stocks can tolerate higher rates. "We're in the part of the cycle where interest rates can rise without sending the equity market down because there's enough earnings growth and there's enough expected return," he said, according to CNBC.
Dalio cautioned that this buffer is narrowing. Equities entered the current cycle with expected returns well above those available from bonds, which helped stocks hold up as borrowing costs rose. That spread has compressed as stock prices and bond yields have both climbed, leaving less of a cushion. Dalio said investors should look beyond headline earnings and focus on how much cash companies actually generate. "I think you have to pay attention to free cash flows ... Not just earnings," he said.
Dalio also expressed doubt about fiscal consolidation, saying he is not hopeful that politicians will be able to reconcile their differences and reduce the country's debt burden. Taken together, his comments point to a view that tighter financial conditions are still working through markets, with the bond selloff as the main channel through which pressure may reach equities and corporate credit.
Dalio argued that rising yields are beginning to filter through to credit markets. He said credit spreads are starting to widen and that higher borrowing costs will eventually reduce credit and spending across the economy. For now, however, he said stocks can tolerate higher rates. "We're in the part of the cycle where interest rates can rise without sending the equity market down because there's enough earnings growth and there's enough expected return," he said, according to CNBC.
Dalio cautioned that this buffer is narrowing. Equities entered the current cycle with expected returns well above those available from bonds, which helped stocks hold up as borrowing costs rose. That spread has compressed as stock prices and bond yields have both climbed, leaving less of a cushion. Dalio said investors should look beyond headline earnings and focus on how much cash companies actually generate. "I think you have to pay attention to free cash flows ... Not just earnings," he said.
Dalio also expressed doubt about fiscal consolidation, saying he is not hopeful that politicians will be able to reconcile their differences and reduce the country's debt burden. Taken together, his comments point to a view that tighter financial conditions are still working through markets, with the bond selloff as the main channel through which pressure may reach equities and corporate credit.
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