After Buffett, Dalio Jumps on the Bond-Trashing Train

Ray Dalio speaking at Summit LA18 in Los Angeles
Amy Harris/Invision/AP/REX / Shutterstock.com

Ray Dalio, founder of one of the world’s largest hedge funds, Bridgewater Associates, questions the economics of investing in bonds, as bond markets offer “ridiculously low yields,” according to a post he wrote on Linkedin this week.

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In the post, entitled “Why in the World Would You Own Bonds When…,” Dalio argues that real yields of reserve currency sovereign bonds are negative and the lowest ever, and real yields of cash are even worse, though not as negative as they were in the 1930-45 and 1915-20 great monetization periods.

“These extremely low or nonexistent yields do not meet these asset holders’ funding needs. For example, pension funds, insurance companies, sovereign wealth funds, and savings accounts cannot meet their financial needs with these investments so holding bonds assures their failure to meet their obligations. At the same time, while there is some room for diversification benefit, because of limitations of how low interest rates can go, bond prices are close to their upper limits in price, which makes being short them [sic] a relatively low-risk bet,” Dalio writes.

He adds that “the economics of investing in bonds (and most financial assets) has become stupid.”

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“Think about it. The purpose of investing is to have money in a storehold of wealth that you can convert into buying power at a later date. When one invests one gives a lump-sum payment for payments in the future. Let’s look at what that deal now looks like. If I give $100 today how many years do I have to wait to get my $100 back and then start collecting the reward on top of what I gave? In US, European, Japanese, and Chinese bonds an investor has to wait roughly 42 years, 450 years, 150 years, and 25 years respectively to get one’s money back and then one gets low or nil nominal returns,” he says.

Dalio is not the only big-name investor to get on the bond-trashing bandwagon lately.

Warren Buffett, in his annual letter to shareholders released on Feb. 27, said that “Bonds are not the place to be these days…Fixed-income investors worldwide — whether pension funds, insurance companies or retirees — face a bleak future. Some insurers, as well as other bond investors, may try to juice the pathetic returns now available by shifting their purchases to obligations backed by shaky borrowers,” Buffett wrote in the letter.

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About the Author

Yaël Bizouati-Kennedy is a former full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.

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