Ray Dalio, founder of Bridgewater Associates and billionaire investor, issued a warning following Moody’s recent downgrade of the U.S. sovereign credit rating. Dalio argued that Moody’s assessment underestimates the real risks facing U.S. Treasurys because it fails to consider the possibility that the federal government might resort to printing money to cover its debt obligations. According to Dalio, credit ratings typically only measure the likelihood of the government defaulting on its debt payments, but they overlook the larger danger that arises when a country inflates its currency to pay off debt, which can erode the value of the returns bondholders receive.
Dalio highlighted this point in a social media post, explaining that the true risk to holders of U.S. government bonds lies not only in the risk of missed payments but also in the risk of diminished purchasing power due to inflation caused by money printing. This scenario means investors may face losses not because the government fails to pay the nominal amount owed, but because the money they receive has less real value.
Last Friday, Moody’s downgraded the U.S. credit rating from the highest level, Aaa, to Aa1. This decision reflected concerns about the country’s growing budget deficit and the rising interest costs required to service its national debt. Moody’s was the last among the three major credit rating agencies to lower the U.S. rating. Following this downgrade, U.S. stock markets experienced declines, and yields on government bonds increased sharply. The 30-year Treasury bond yield surged to nearly 5%, while the 10-year Treasury yield rose above 4.5%.
Dalio emphasized that for those invested in U.S. government debt, the actual risks are greater than what credit rating agencies portray. Investors need to be aware of the inflationary threat and its impact on the real value of their investments.
In addition to these concerns, Bridgewater Associates, the world’s largest hedge fund, has experienced a significant decline in assets under management. Reports indicate an 18% drop in 2024, reducing the firm’s assets to approximately $92 billion, down from a peak of $150 billion in 2021. This decline may reflect broader market uncertainties and investor apprehension related to economic and fiscal challenges, including those highlighted by the credit downgrade and Dalio’s cautionary remarks.
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