Three market experts have expressed concern that growing US debt will push interest rates higher.
Ray Dalio and Bill Gross both pointed to an imbalance between supply and demand that will continue to fuel borrowing costs.
U.S. debt supply will only increase because a recession would widen the federal deficit, Jeffrey Gundlach added.
The US national debt is soaring, and leading market experts are raising red flags as more red ink is on the way and a potential recession is looming.
The warnings come as federal deficits have exploded in recent years, sending the trajectory of U.S. debt soaring. The Treasury Department has already auctioned $1 trillion in bonds this quarter. Meanwhile, borrowing costs have soared over the past year and a half as the Federal Reserve began an aggressive tightening campaign.
Over the past week, Wall Street giants Ray Dalio, Bill Gross and Jeffrey Gundlach have weighed in:
The founder of Bridgewater Associates said he won’t invest in bonds and instead cited cash as good for now.
Speaking at the Milken Institute Asia Summit in Singapore, Dalio explained that a widening budget deficit is forcing the Ministry of Finance to issue bonds.
But the surge in the supply of new US debt is not the only problem. If investors don’t receive enough real interest, they will sell their bonds, he warned.
“The supply-demand [imbalance] is not just the number of new bonds. It’s a question of ‘do you choose to sell the bonds?’ Personally, I believe that bonds are not a good investment in the longer term,” Dalio said at the event on Thursday.
While interest rate increases would help boost demand for bonds, they make servicing debt more expensive.
“If interest rates rise, the central bank has to make a choice: do they let them rise and have consequences, or do they print money and buy those bonds? And that has inflationary consequences,” says Dalio. said. “So we’re seeing that dynamic happening now.”
The ‘bond king’ who fueled Pimco’s success in fixed income had similar concerns about the debt market.
In an interview with Bloomberg’s Odd Lots podcast, he noted that a third of outstanding U.S. debt will mature within a year. To ensure that the Ministry of Finance can comply with this, it will have to attract a large group of buyers.
Again, this is dependent on interest rates increasing.
Gross noted that the Fed’s quantitative tightening campaign is exacerbating the supply-demand imbalance as it eliminates the central bank as a buyer of bonds. And a lack of demand means government bond prices will remain low, he warned.
“It’s precarious at some point,” he said. “I’m not saying we should go away. I’m just saying assets have to rise or the economy won’t do well.”
Gundlach, who has been dubbed the “bond king,” expects a flood of government bonds, warning that a coming recession will widen the federal deficit.
“What’s going to be so confusing to people is that once we get deeper into the recession, bond yields are actually going to start rising due to excessive money printing and monetary responses,” he told Fox Business.
While many economists have warmed to the prospect of a soft landing, Gundlach insists a recession is likely within six to eight months as pandemic-era consumers’ savings have been depleted.
If this happens amid the Fed’s tight policy, the economy could spiral into deflation, he predicted, forcing the government to plunge deeper into debt.
“I think the Fed realizes in the back of their minds that when the next recession comes, the amount of lending is going to be so enormous that it’s going to be a very bad idea to have interest rates above 5%.” he said.
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