Ray Dalio warns US bond bear market has a long way to go as debt supply swamps demand

Dalio’s analysis points to sustained upward pressure on long-dated Treasury yields, as heavy issuance meets weakening demand from foreign buyers and a Fed buying mainly bills. That supports a steeper yield curve and keeps term premium in focus. His warning on Japanese repatriation is significant for currency markets: an unwind of currency-hedged Treasury holdings could support the yen and Japanese government bonds while adding to selling pressure on US debt. For credit, his focus on accelerating hyperscaler issuance and declining free cash flow suggests AI-linked corporate bonds may need to offer wider spreads to clear the market. Equities are the lagging risk in his framework: he sees stocks as vulnerable once higher yields start to bite, with a surge in AI-related equity supply adding to the strain. Reduced demand for US debt from Middle Eastern oil exporters ties the outlook partly to energy markets, as oil revenues shape their capacity to recycle surpluses into Treasuries.- Ray Dalio’s message is that the bond sell-off is not a passing storm but the middle of a cycle he mapped out last year, and the bill for stocks has not yet arrived.Summary:Ray Dalio says the US is in the mid-cycle stage where rates have risen sharply but have not yet hit stocks, credit spreads or the economy, and the bond bear market probably has much further to runThere is about $32 trillion of marketable Treasury debt, up 8% in a year, with about $2.1 trillion of net new issuance expected in 2026; bills now make up about half of issuance, against a historical target of about 20%Foreign investors hold about $9.3 trillion of Treasuries, and Dalio sees Japan and China as having incentives to reduce holdingsTotal government debt service, including principal rollovers, is around 200% of federal revenue, and interest costs are about 21% of revenueTotal US net fixed-income financing needs are seen at around $4.4 trillion in 2027, with corporate borrowing driven heavily by AI capexEquity issuance surged to a $1.8 trillion annualised pace in the first half, led by the AI build-out, adding to the supply of financial assetsThe US bond bear market probably has a long way to go, according to Bridgewater Associates founder Ray Dalio, who warns that the supply of debt and equity coming to market is far larger than investors can absorb without higher yields and lower prices.In a new article, Dalio said developments since he published his book on how countries go broke in June 2025 have tracked his template closely. He argues the US is now in the middle of the cycle, where interest rates have risen sharply and central banks are tightening, but before those moves have hit stocks, credit spreads and economic activity. Historically, he said, rates keep rising at this stage until weakness in rate-sensitive markets and sectors starts to restore balance.On supply, Dalio noted there is about $32 trillion of marketable Treasury debt outstanding, up 8% in a year, with about $2.1 trillion of net new issuance expected in 2026. Treasury has shifted heavily toward short-term bills, which now account for about half of issuance compared with a historical target of around 20%. He said this eases pressure on long-dated yields but raises rollover risk and makes interest costs more volatile.On demand, Dalio said foreigners own about 32% of Treasuries and the Fed about 14%, and support is shifting toward domestic buyers. He highlighted China and Japan as the key holders to watch. Concerns over US debt, diversification into gold and fear of sanctions are reducing Chinese appetite, while Japan has incentives to repatriate capital to support the yen and its bond market. That could unwind currency-hedged carry trades in a disruptive way. Middle Eastern oil exporters are also buying less US debt, he said.Debt service is the second pressure point. Dalio said the average rate on existing debt is about 3.5%, against market rates of 4% to 5.5%, so interest costs will keep climbing as debt rolls over even if rates stay put. A one percentage point rise would eventually add about $310 billion a year in interest. Total debt service, including principal rollovers, is around 200% of government revenue.Dalio stressed that Treasury is competing with a surge in corporate borrowing driven by AI investment. He expects total US net fixed-income financing needs of around $4.4 trillion in 2027. He described hyperscaler bond issuance, which reached about $220 billion in the first half of 2026 against about $108 billion for all of 2025, as the canary in the coal mine. Rising capex is already eroding free cash flow and pushing up credit spreads.Equity supply is surging too. Issuance hit a $1.8 trillion annualised pace in the first half, Dalio said, driven by AI-related IPOs, secondary offerings and private fundraising. Globally, OECD governments are expected to borrow about $18 trillion gross in 2026. Dalio concluded that the supply of financial assets appears much larger than demand can absorb, though he noted his views are not investment advice.  This article was written by Eamonn Sheridan at investinglive.com.