Dalio: Fed's Sharp Rate Cut Not Normal, US Treasuries Now "High Risk"
Billionaire investor and founder of the world's top hedge fund, Bridgewater Associates, Ray Dalio, recently stated that he expects the Federal Reserve not to "cut interest rates significantly." A rate cut starting with 50 basis points is by no means the norm, as the U.S. economy remains "in a relatively good balance," and he emphasized that given the recent sharp fluctuations in the U.S. Treasury market due to expectations of rate cuts, U.S. Treasuries have become a high-risk investment.
"The current U.S. Treasury bonds are not a good investment," the founder of Bridgewater Associates and a legendary figure in the hedge fund industry said in a speech at the Greenwich Economic Forum on Tuesday. "In my view, we have interest rate risk in the bond market."
Dalio said that investors focused on the U.S. Treasury market are betting on the Federal Reserve to take a rapid rate cut pace, but this aggressive dovish expectation seems to be premature. Last month, the Federal Reserve cut interest rates for the first time in four years, unexpectedly lowering the federal funds rate by 50 basis points, opening the curtain on a new round of rate cuts. However, the extremely strong non-farm employment report in September provided policy makers at the Federal Reserve with the space to cut rates at a slower pace, and some interest rate futures traders are betting on strong non-farm employment, coupled with the CPI released this week, which may exceed expectations, pushing the Federal Reserve to possibly announce a pause in the rate cut process in November or December.
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Since August 1st, the interest rate futures market has priced for the first time that the Federal Reserve's benchmark interest rate cut by the end of the year will be less than 50 basis points, which means that some traders are even pricing that the Federal Reserve may choose to pause the rate cut process at the FOMC meeting in November or December before the end of the year.
Oh-sung Kwon, an equity and quantitative strategist at Bank of America, said in a report released on Sunday: "Inflation is unlikely to be weak enough to ensure a 50 basis point rate cut, but very strong inflation data may make the Federal Reserve's rate cut process in November less certain, and the market call for a pause in rate cuts may become more intense." This crucial CPI data report will be released on Thursday evening Beijing time.
The U.S. Treasury market has been more volatile this year, with the 2-year U.S. Treasury yield, which is most sensitive to interest rate expectations, fluctuating between 3.5% and over 5%, meaning that the price fluctuation of U.S. Treasuries of this maturity is very large, which is very rare for bond assets, mainly due to the sharp fluctuations in U.S. Treasuries brought about by interest rate cut expectations.
In the current U.S. Treasury trading market, as most global bond traders have given up their bullish bets on U.S. Treasuries at least in the short term, on Monday, the 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," rose to its highest level since August, breaking through the key U.S. Treasury yield threshold of 4%. For the price trend of the 10-year U.S. Treasury this year, its price fluctuation is not as large as that of the 2-year U.S. Treasury, but compared to the historical average fluctuation, it has already been very large.
Since the strong employment report released late last week, traders in the U.S. Treasury market have been giving up their long positions in several futures contracts linked to the Secured Overnight Financing Rate (SOFR). This largely indicates that the bullish bets on a series of significant rate cuts in the U.S. Treasury market this year and early in 2025 have been lifted, which may lead to a sharp downward trend in U.S. Treasury prices.
Dalio said in his speech that U.S. Treasuries account for a large proportion in the investment portfolios of institutional investors and central banks, and such a "high allocation" ratio is not good news for U.S. Treasuries. He added that the uncertainty brought by global geopolitics is also a problem for the U.S. Treasury market, and the high interest costs for the U.S. Treasury also bring risks. "Foreign institutional investors may worry about the risks of holding U.S. Treasuries because they may be subject to unexpected sanctions."
In a broader interview, Dalio focused on the U.S. presidential election and its potential impact on the market. The founder of Bridgewater Associates is optimistic about the economic policies of former U.S. President Donald Trump, saying that the presidential candidate's proposal to lower corporate tax rates is "more in line with the essence of classical capitalism.""He made a very good point about increasing the ability to impose tariffs," Dalio said, adding that he calculated Trump's tariff proposal would add about $800 billion annually.
However, he said that such tariffs could trigger a resurgence of inflation.
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