Bridgewater founder Ray Dalio warns of ‘UK debt death’

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Ray Dalio, the billionaire founder of hedge fund firm Bridgewater Associates, has warned that the UK could be heading for “debt death”, where it must borrow more to service its rising costs.

Dalio told the Financial Times that the recent sell-off in the gilt market, coupled with strong volatility, suggests the market is struggling to meet the UK’s higher borrowing requirements since last October’s Budget. .

The combination of rising annual repayments, already above £100bn a year, and the need to cover debt with high borrowing costs, created a risk of make a living, he said.

This “looks like an increasing disease because it will need to borrow more to service the debt that will have to be worked on, to reduce other costs, or to need more taxes”, said Dalio in an interview.

The market turmoil “reflects a supply-demand problem” for gilts, he said. “Why else would long-term (yields) go up when there is (fiscal) policy, the exchange rate goes down, and the economy is weak?”

He added that the US is “showing signs” that the market may start to struggle to meet its borrowing needs, and called dealing with the national debt the “first big issue” for the time being President Trump’s second.

Global bond sales in recent months have sent borrowing costs soaring in major economies such as the UK and US, even as central banks continue to cut interest rates.

UK 10-year borrowing costs rose from 3.75 per cent in mid-September to 16 years earlier this month at 4.93 per cent, amid a global bond selloff and worries about the economy UK. Yields are up 4.66 percent on Monday.

US 10-year yields reached 4.62 percent, up one percentage point over the same period. Products move in a different way than prices.

The main driver has been higher-than-expected inflation, which has pushed markets lower to record lows, but some big investors have also raised concerns about high levels of borrowing by existing countries. they carry huge debt burdens.

“When you get to the point where you have to borrow money to service the debt and the interest rate goes up, so the debt service fees go up, so you have to borrow more money to pay it off, you’re in what the markets call . a death of the soul,” said Dalio, who this month published the first part of his new analysis of the debt crisis, How Countries Formed.

“As those risks increase, everyone looks at the need to borrow more money at higher interest rates, which creates (a) self-inflicted debt crisis.”

The sell-off in sterling and gilts recalled the market’s struggles following former Prime Minister Liz Truss’ “mini” 2022 Budget. At the time, Dalio wrote that the market’s decline “suggests ignorance”.

Investors largely rejected the comparison, in part because the sell-off was not as big or sharp, but the government was forced to defend its economic plans this month as its borrowing costs hit a crisis. the latest finance minister, while chancellor Rachel Reeves is in attendance. face to face resignation calls.

A Treasury spokesman said the government’s “commitment to fiscal policy and sound public finances is non-negotiable”, and added: “The Chancellor has already shown that difficult decisions about spending will be picked up, while the spending review continues to weed out the waste.”

Dalio has called for US and UK government deficits to be cut to 3 percent of GDP. The US deficit is expected to remain above 6 percent of GDP this year, while the UK is set to hit 4.5 percent this fiscal year.

Some analysts have warned that cutting too much money or paying new taxes will hurt countries’ economic growth and affect their finances.

Dalio acknowledged that “reducing the budget deficit is a depressing factor for growth and inflation, (but) it will lead to lower interest rates and those lower rates have a greater impact on the stimulus when they are reducing the budget deficit”.

Dalio, who stepped down as Bridgewater’s seat in 2021 but remains on the board, has forewarned with the risk of increased US debt to Treasuries investors. He did not set a time when what he called a “debt bomb” would start for the debtor countries.

He said: “It’s like a person with a lot of plaque in their arteries that is growing rapidly.” Debt payments are “build​​​​​​​​and reduce other costs and cause the risk that the plate is broken. You can’t know exactly when that will happen but you can say that the risks are very high” and they increase.”