Ray Dalio Says Bond Bear Market Has ‘More To Go’ As Government, Companies Compete For Capital

• Dalio said credit spreads are starting to widen.
• He said governments and companies are competing for capital and that higher borrowing costs would eventually reduce credit and spending.
• For now, earnings growth remains strong enough for stocks to absorb higher rates, he said.

Billionaire investor Ray Dalio reportedly said Thursday stocks have so far been able to withstand rising interest rates because earnings growth and expected returns remain strong enough.

Speaking to CNBC at the Milken Institute Asia Summit in Singapore, the Bridgewater Associates founder said, “We’re in the part of the cycle where interest rates can rise without sending the equity market down because there’s enough earnings growth and there’s enough expected return”.

Treasury yields continued to climb Thursday, with the 10-year yield rising more than 5 basis points to 5.331%, near levels last seen in 2002, while the 30-year yield traded around 5.702%, near a 24-year high.

Dalio Says Stocks’ Cushion Has Come Down

Dalio said equities entered the current cycle with expected returns significantly above those available from bonds, helping stocks hold up as borrowing costs increased. But that cushion has narrowed as stock prices and bond yields have risen.

“Because of that change in pricing, that cushion has come down, and so now you’re starting to see credit spreads start to widen,” the billionaire investor said. Dalio added that investors should look beyond headline earnings and focus on how much cash companies actually generate.

“I think you have to pay attention to free cash flows ... Not just earnings,” he said.

Dalio noted that companies can report earnings while continuing to invest without getting cash back from those investments, creating “a liquidity issue that’s evolving. While earnings should continue to improve, he thinks free cash flows will deteriorate.

Bond Bear Market Has ‘More To Go’

Dalio expects the bond selloff to continue as governments and companies compete for capital, saying the bond bear market is “pretty clear” and that his guess is there is “more to go.”

He said higher borrowing costs would eventually reduce credit and spending. For now, however, he noted that earnings growth remains strong enough for stocks to absorb higher rates.

As of this writing, the iShares 7-10 Year Treasury Bond ETF (IEF) was down 0.38%, while the iShares 20+ Year Treasury Bond ETF (TLT) was down 0.76%. On Stocktwits, retail investors’ sentiment for TLT remained ‘bullish’, while sentiment around IEF flipped to ‘bearish’ amid high message volume. 

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