Billionaire Ray Dalio has issued a new warning about stocks losing their cushion against rising bond yields, as the buffer protecting equities from Treasury market pressures continues to shrink. Speaking at the Milken Institute Asia Summit in Singapore, Dalio told CNBC that 'Because of that change in pricing, that cushion has come down, and so now you're starting to see credit spreads start to widen'. The 10-year Treasury yield currently hovers near 5.3% to 5.36%, levels last seen in the early 2000s, creating significant pressure on equity valuations. According to CNBC, strategist Stan Wong noted that yields above 5.25% raise the bar for stocks, requiring equities to deliver stronger growth and cash flow to justify their premium over bonds. Dalio expects free cash flow to deteriorate even as earnings continue improving, as heavy capital spending by technology firms building AI capacity already squeezes cash flow despite rising reported profits.
Billionaire Ray Dalio has issued a stark warning about potential weakening demand for US Treasuries from two of the country's largest foreign creditors. According to reports from The Financial Express, Dalio, founder of Bridgewater Associates, stated that China and Japan may reduce their holdings of US government debt, which could significantly impact the Treasury market. The US depends on foreign investors for approximately one-third of its debt, with Japan and China accounting for a substantial portion of that demand. In an interview with Bloomberg Television in Singapore on Tuesday, October 6, Dalio warned that 'The titles of the American Treasury are vulnerable' due to reduced demand from major creditors. His comments came after US Treasury Secretary Scott Bessent tried to reassure investors that a mix of economic growth and spending restraints will 'very quickly' start to alter the path of US government borrowing. The latest developments suggest these concerns could trigger a debt crisis within the next three years.
Dalio has significantly escalated his warnings about artificial intelligence investment risks, now describing AI as 'a classic bubble' that is nearing bursting point. Speaking at the Forbes Global CEO Conference in Singapore on Wednesday, Dalio warned that a huge amount of debt is being taken out to fund AI as rates continue to climb. 'We're in the part of the cycle that is before that but approaching that,' the Bridgewater founder said. 'I think we're close to that.' His comments come as technology giants spend hundreds of billions of dollars on AI, increasingly financed with debt, with market gains concentrating in a handful of stocks. Bond yields around the world have surged to the highest in decades, increasing the cost of funding the enormous investment needed to build AI infrastructure. Despite rising equity valuations, Dalio noted that 'Everybody says 'I'm worth a billion dollars' but OK, try to spend that' - emphasizing that converting wealth into cash will eventually pop the bubble. He also warned that wealth taxes and other efforts to convert unrealized gains into cash could trigger the collapse of the AI bubble.
Dalio cited both geopolitical and economic factors driving potential changes in foreign investment patterns. As reported by The Financial Express, he explained that 'The Chinese don't want to continue to accumulate — there are geopolitical issues as well as economic issues.' He emphasized the challenging dynamic of having a debtor-creditor relationship with an adversary, noting that this creates particularly difficult conditions for maintaining investment flows. The billionaire investor noted that 'When you have a debtor-creditor relationship and you have an adversary relationship, that's a very difficult dynamic.' He added that Japan has lent 'a lot of money' that it now wants to take back, highlighting the complex nature of these relationships. Data from the US Treasury Department's Treasury International Capital (TIC) report confirms that both creditors have indeed pared back their holdings in recent months.
US Treasury bonds have experienced significant weakness this week, with 10-year Treasury yields around 5.3%, approaching their highest levels since 2002. According to The Financial Express, global bonds have lost 3% this year, with Treasuries declining 2.8% during the same period. The Treasury market faces growing concerns over high government borrowing and inflation, with similar pressures affecting government bond markets worldwide. In recent weeks, US government bond prices have fallen sharply, with returns rising from 4.66% to 5.26% in just five weeks, as reported by NeoFeed. The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) hit a 52-week low last week, reflecting broader weakness in long-dated bonds. The US Treasury market has been vulnerable this year to increasing investor jitters over government borrowing and inflation risks, with similar concerns roiling sovereign debt markets elsewhere, including France's 10-year bonds suffering their worst quarter since the euro's birth. Multiple pressures explain the squeeze, including large government deficits, persistent inflation, and heavy corporate borrowing for artificial intelligence infrastructure.
Both major foreign holders have already begun reducing their Treasury positions, with recent data confirming the trend. As reported by The Financial Express, Japan's Treasury holdings fell by US$12.8 billion in July to about US$1.1 trillion, with the decline occurring during a month when Japanese authorities supported the yen. Recent figures from Japan's Finance Ministry indicated that Tokyo likely sold a portion of its holdings of foreign securities to help fund its yen intervention moves. China's official Treasury holdings dropped from a peak of US$1.3 trillion in 2013 to about US$618 billion in July, making it the third-largest foreign holder. However, market analysts suggest that the figure may be an undercount as holdings of other countries such as Belgium likely include Chinese custodial accounts, with the latest figures for Belgian Treasury holdings standing at US$470.7 billion. According to the latest TIC data, China's holdings fell to $618 billion in July, down from $633.4 billion in June, marking the lowest level since 2008 — less than half the peak of $1.317 trillion reached in November 2013. Japan's holdings declined for a fifth straight month from a February high of $1.239 trillion to $1.104 trillion, though it remains the largest foreign holder. Total foreign holdings slipped to $9.25 trillion in July, a second consecutive monthly decline.
