Ray Dalio is Wrong About the Treasury Bond Market

June 5, 2025 | Bridgewater founder Ray Dalio has been warning us about debt and deficits for some time, and on one level he is entirely right. In fact, CNBC has created a whole theme park of Dalio market wisdom that makes for a nice reference resource for historians. For example, Dalio said at an event for the Paley Media Council in New York:

“I think we should be afraid of the bond market. It’s like ... I’m a doctor, and I’m looking at the patient, and I’ve said, you’re having this accumulation, and I can tell you that this is very, very serious, and I can’t tell you the exact time. I would say that if we’re really looking over the next three years, to give or take a year or two, that we’re in that type of a critical, critical situation.”

American leaders like Dalio correctly assess the fiscal mess in Washington, yet somehow we all seem incapable of looking at the situation globally, from the perspective of Europe, Japan or China. For 75 years since WW II, the other nations of the world have benefitted from American excess – so much so that they have no immediate incentive to change anything. When President Trump uses the threat of tariffs to start a long overdue conversation about the role of the US in the global economy, he is asking the right question.

As Dalio and other market mavens warn about impending catastrophe in the bond market, we are unimpressed because we know that markets underestimate just how bad things can get. Even as the US heads for fiscal insolvency and hyperinflation, the latter comes via the Fed’s quantitative easing (QE) BTW, the rest of the world will continue to use dollars as a means of exchange and also for financing. Why not? After all, as we note in our new book "Inflated: Money, Debt and the American Dream," the global dollar is a free good created in the aftermath of war.

Naturally, the fee-driven inhabitants of the financial ghetto known as Wall Street have no incentive to cry foul. If major investment funds sold stocks to protest the lack of deficit reduction in Trump’s big beautiful bill, the original document would be in the trash the next day and House and Senate conservatives would be driving the bus. Instead, Wall Street professionals pretend that things can continue pretty much as normal despite the very specific warnings of billionaire sages like Dalio.  If the going gets tough, the Fed will just drop interest rates to 2020 levels, right? But hyperinflation, not fiscal collapse, is the real danger.

How is our collective delusion possible? First and foremost, the narrative used to describe the US economy, Fed policy and factors like inflation and employment, is entirely domestic in focus. We almost completely ignore the offshore market for dollars and dollar financing. Yet no matter what ridiculous policies come spinning out of Washington, the 10-year Treasury note and longer dated issues somehow seem to grind back down in yield. Even with the slow deterioration in the functioning of the Treasury market, somebody seems to be buying dollar paper. Could this be because much of the world is already dollarized?

The simple answer is that demand for dollars and dollar-denominated, “risk free” assets like Treasury debt and Ginnie Mae passthroughs, remains brisk. Notice that the debt of Fannie Mae and Freddie Mac are no longer considered risk free assets by global central banks. More, the need for risk free collateral in dollar financings and currency swaps is vast and serves to boost demand. Nobody on the FOMC ever talks publicly about the global market for dollars because the Federal Reserve Act is silent on external factors. It's as though the global role of the dollar as a reserve currency created 75 years ago by Bretton Woods is somehow not relevant to US monetary policy. 

The dollar is on one side of 80% of all currency transactions. Also, the strong economic growth coming from the emerging markets means that demand for dollars and dollar collateral is likely to grow.  Or to put it another way, none of the other global currencies can begin to absorb the demand for dollars – at least without stoking huge internal inflation. Just as there was not sufficient physical currency to meet the demands of 19th Century American, today the needs of the global economy may outstrip even the rapid currency inflation being engineered by the Federal Reserve Board via QE to keep pace with the growth in federal debt.

When Ray Dalio says to be afraid of the bond market, he is asking a question that belongs in the mid-1970s, when the dollar still competed with other currencies and US interest rates were actually affected by interest rates in other nations. But today, with many of the other industrial nations led by Japan, China and the EU literally drowning in public debt, the US is still the leader of the hideous fiat currency parade.

As all global central banks march toward a day of reckoning and hyperinflation, the fiat paper dollar remains the global standard -- for now. Notice the huge increase in the total assets of US banks since 2020 vs the total Fed SOMA portfolio, as shown in the chart from FRED below.

“The rise in longer-term US and developed-market bond yields risks becoming entrenched as fiscal largesse becomes a feature of economies, rather than a temporary bug,” writes Simon White of Bloomberg. “It’s easy to forget it’s not just the US — in its third year of running deficits of more than $1.5 trillion — that has abandoned fiscal restraint. Also across Europe and Japan, the list of what electorates expect from their governments is expanding, in the sovereign version of the Fed put: the fiscal put.”

The good and bad news of sorts is that the US bond market will continue to function, even though we have annihilated most of the primary dealers of Treasury debt since 2008 and especially since 2020. US banks will be forced to purchase more ST Treasury debt, one reason that Treasury Secretary Scott Bessent will soon drop government debt from The Supplementary Leverage Ratio (SLR).

Source: FDIC

If the Trump Administration prevails and wins trillions of dollars more in unfunded tax cuts to support Republican hopes in the midterm elections next year, then the next step for the Federal Open Market Committee will be to restart QE to ensure that the Fed’s balance sheet keeps pace with the burgeoning federal debt. But this time, rather than falling interest rates, QE may resume in the context of rising wages and prices, and higher short-term interest rates, as the Fed makes a last futile effort to control inflation. Get used to it.  

We'll be describing the forward risks facing US investors in a future

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