- Three market experts expressed concern that rising U.S. debt would lead to higher interest rates.
- Both Ray Dalio and Bill Gross pointed to the imbalance in supply and demand that will continue to increase borrowing costs.
- Jeffrey Gundlach added that the supply of U.S. debt will only increase as the recession widens the federal deficit.
America’s debt is soaring, and leading market experts are raising red flags, saying more red flags are coming and a recession is on the horizon.
The warning comes as the federal budget deficit has exploded in recent years and the trajectory of the U.S. debt has skyrocketed. The Treasury Department has already auctioned off $1 trillion in bonds this quarter alone. Meanwhile, borrowing costs have soared over the past year and a half as the Fed embarked on an aggressive tightening campaign.
Over the past week, Wall Street giants Ray Dalio, Bill Gross, and Jeffrey Gundlach have weighed in:
Ray Dalio
The Bridgewater Associates founder said he wouldn’t invest in bonds for now, touting cash instead.
speak at Milken Institute Asia Summit Speaking in Singapore, Dalio explained that the Treasury Department has no choice but to continue issuing bonds because of the ballooning budget deficit.
But the surge in the supply of new U.S. debt is not the only problem. He warned that if investors did not receive high enough real interest rates, they would sell their bonds.
“Demand and supply are [imbalance] It is not simply the amount of new bonds issued. The question is whether to sell bonds or not. Personally, I don’t think long-term bonds are a good investment,” Dalio said at Thursday’s event.
Higher interest rates help drive demand for bonds, but they also make debt servicing more expensive.
“When interest rates rise, central banks have to make a choice: Do they raise interest rates and have those consequences, or do they print money and buy government bonds? And that has inflationary consequences,” Dalio said. He said. “So we’re seeing that dynamic happening now.”
bill gross
The “bond kings” who drove Pimco’s bond market success had similar concerns about the bond market.
In an interview on Bloomberg’s “Odd Lots” podcast, he pointed out that one-third of the nation’s outstanding debt matures within a year. To ensure that the Treasury can accommodate this, it will need to attract a large number of buyers.
Again, this is dependent on interest rates rising.
Gross said the Fed’s quantitative tightening policy exacerbates the imbalance between supply and demand, given that it removes the central bank from being a buyer of bonds. And the lack of demand means Treasuries prices will remain low, he warned.
“At some point, it becomes unstable,” he said. “I’m not saying get out. I’m just saying the economy won’t work unless wealth increases.”
Jeffrey Gundlach
Gundlach, also known as the “bond king,” is predicting a large influx of U.S. debt and warning that the coming recession will deepen the federal budget deficit.
“What’s really disconcerting to people is that once the recession gets deep, bond yields actually start to rise because of excessive money printing and monetary policy,” he said. fox business.
While many economists are positive about the prospect of a soft landing, Gundlach argues that a recession is likely within six to eight months as pandemic-era consumer savings are depleted. ing.
If this happens amid the Fed’s tightening policies, he predicted, the economy could slip into deflation and the government could be forced to take on even more debt.
“I think the Fed understands in the back of its mind that when the next recession comes, the amount of borrowing will be so huge that it would be a very bad idea to raise interest rates higher than 5%. I think so,” he said.
