Ray Dalio Says Bond Bear Market Has Begun, Expects Historic Crash

Joining the likes of Bill Gross and Jeffrey Gundlach, and echoing his ominous DV01-crash warning to the NY Fed from October 2016, Bridgewater's billionaire founder and CEO Ray Dalio told Bloomberg  TV that the bond market has "slipped into a bear phase" and warned that a rise in yields could spark the biggest crisis for fixed-income investors in almost 40 years.

“A 1 percent rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981," Bridgewater Associates founder Dalio said in a Bloomberg TV interview in Davos on Wednesday. We’re in a bear market, he said.

Readers may recall that when addressing the NY Fed in October 2016, Dalio made virtually the same prediction when he commented on the bond market's DV01:

... it would only take a 100 basis point rise in Treasury bond yields to trigger the worst price decline in bonds since the 1981 bond market crash. And since those interest rates are embedded in the pricing of all investment assets, that would send them all much lower.

Dalio is referring to the record DV01 in the bond market, which according to the latest OFR report released in December, has risen to $1.2 trillion: that's the P&L loss from a 100bps rise in rates.

The watchdog found that "valuations are also elevated" in bond markets. Of particular interest is the OFR's discussion on duration. Picking up where we left off in June 2016, and calculates that "at current duration levels, a 1 percentage point increase in interest rates would lead to a decline of almost $1.2 trillion in the securities underlying the index."

Visually:

However, as we explained last December, this is a low-ball estimate which "understates the potential losses" as it "does not include high-yield bonds, fixed-rate mortgages, and fixed-income derivatives", which would suggest that the real number is likely more than double the estimated when taking into account all duration products. As a reminder, Goldman calculated the entire duration universe at $40 trillion as of the summer of 2016, resulting in $2.4 trillion in losses for a 1% move. By now the number is far, far greater.

* * *

Speaking at Davos, Dalio also predicted that the Federal Reserve will tighten monetary policy more than they have signaled, and said that "economic growth is in the late stage of the cycle but could continue to improve for another two years."

Echoing what he said on CNBC yesterday, Dalio said that The current economic environment is good for stocks but bad for bond investors.

“It feels stupid to own cash in this kind of environment. It’s going to be great for earnings and great for stimulation of growth."

Following Dalio's remarks, Treasury yields spiked and are legging higher again, back above 2.65%

https://www.zerohedge.com/sites/default/files/inline-images/20180124_10Y1.jpg

... while the yield curve is steepening back above YTD flat...

https://www.zerohedge.com/sites/default/files/inline-images/20180124_10Y2.jpg

His full interview below:

Comments

LawsofPhysics davatankool Wed, 01/24/2018 - 08:49 Permalink

Using technical analysis that worked in the past, before central bankers/financiers all over the planet started a co-ordinated effort to preserve their power and control is total fucking irrelevant. There is no mechanism for true price discovery, period.

 

The laws of physics and Nature are reasserting themselves.  If you are a useless fucking paper/digit-pusher I suggest you learn some tradable skills.

In reply to by davatankool

lester1 Wed, 01/24/2018 - 08:25 Permalink

Apparently Ray Dalio never heard of the unaudited Federal Reserve's Plunge Protection Team.

 

Ray, we know you read ZH. Please educate yourself on why the Fed remains unaudited so they can manipulate markets and keep everything from crashing!

knukles Wed, 01/24/2018 - 08:37 Permalink

Historically when any country has called for a weaker currency it will get weak big time.  Any time support has been withdrawn, the currency plummets, for any central bank at any point in time.
PMs should respond nicely.

This is a Game Changer.

 

ejmoosa Clint Liquor Wed, 01/24/2018 - 08:54 Permalink

I've said this before but will again:

That debt service will require higher prices from those corporations.

Higher prices will lead to higher reported inflation.

Higher reported inflation will lead to higher rates.

 

The Fed will be puzzled why they cannot stamp out inflation as they are raising the rates.

 

But we will understand clearly.

In reply to by Clint Liquor

Rickety Rekt Clint Liquor Wed, 01/24/2018 - 09:27 Permalink

All the banks are getting very aggressive in pricing. Right now BA spreads are about 100bps over cdor, and are sliding fast because banks like NBC and TD want to grow their balance sheets by a few billion. Likely slide back to 50bps seen 15 years ago. Was told "will deal with the consequences later", the battle of bloomberg league tables. Libor spreads will do the same, minimizing some of the rate increases. 

Also, they just reamortize the term debt to lower the payments and kick the can down the road, while sucking interest like a swarm of mosquitoes. Seen this numerous times, always rubbed me the wrong way. 

Off topic, but did anyone notice the markets went parabolic when crypto crashed? Overlay the charts. Me thinks there are some larger players than originally thought. Could indicate crypto is somewhere funds will run to when/if SHTF

In reply to by Clint Liquor

1 Alabama LawsofPhysics Wed, 01/24/2018 - 08:50 Permalink

How can there not be, money is coming out like an exploding volcano to the elite, incentivized by a chasing yield environment the frenzy to beat the financial Jones's is peaking along with the insanity that orbits it. The zoo animals are anxious, the MASH unit are packed, The court house has been put on notice, but the King is happy so everyone plays along.
 

In reply to by LawsofPhysics