Dalio says US bond sell-off far from over as supply overwhelms demand

According to Dalio, long-dated Treasury yields face persistent upward pressure because heavy issuance runs into shrinking demand from overseas buyers and a Fed that concentrates on bills. This keeps the yield curve steeper and term premium in focus. His remarks on Japanese repatriation matter for currencies: unwinding currency-hedged Treasury positions could lift the yen and Japanese government bonds while intensifying selling in US debt. On credit, he highlights faster hyperscaler issuance and falling free cash flow, suggesting AI-related corporate bonds may need to offer wider spreads to find buyers. Equities are the last risk in his view: he believes stocks become vulnerable once higher yields begin to bite, with AI-driven equity supply adding pressure. Weaker demand from Middle Eastern oil exporters connects the outlook partly to energy, since oil revenue determines their ability to recycle surpluses into Treasuries.

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Dalio's key point is that the bond sell-off is a mid-cycle event he predicted last year, and stocks have yet to pay the price.

Key points from Dalio:

• Dalio states the US is in the mid-cycle phase with sharply higher rates that have yet to affect stocks, credit spreads, or the economy, and the bond bear market likely has considerable distance to cover.
• Marketable Treasury debt stands at roughly $32 trillion, up 8% year-on-year, with net new issuance expected around $2.1 trillion in 2026. Bills constitute about half of issuance versus a historical target near 20%.
• Foreign holders own about $9.3 trillion in Treasuries. Dalio sees incentives for Japan and China to cut their positions.
• Total government debt service including principal rollovers is about 200% of federal revenue, with interest costs around 21% of revenue.
• US net fixed-income financing needs are estimated at roughly $4.4 trillion in 2027, with AI capital expenditure driving corporate borrowing.
• Equity issuance hit a $1.8 trillion annualised rate in the first half, led by AI investment, boosting the supply of financial assets.

The US bond bear market likely still has a long path ahead, Bridgewater Associates founder Ray Dalio warned, saying the volume of debt and equity hitting the market far exceeds what investors can take in without higher yields and falling prices.

According to Dalio, the trajectory since his June 2025 book about the mechanics of national financial collapse has matched his model. He contends the US sits in the cycle's middle, where rates have climbed steeply and central banks tighten, but before the impact reaches stocks, credit spreads, and the economy. Historically, Dalio noted, rates continue climbing at this phase until weakness in rate-sensitive areas brings back equilibrium.

Regarding supply, Dalio pointed to roughly $32 trillion in marketable Treasury debt, an 8% yearly increase, and roughly $2.1 trillion in net new issuance projected for 2026. The Treasury Department has tilted heavily toward short-term bills, which now represent about half of all issuance versus a historical norm of about 20%. He said this strategy reduces pressure on long-term yields but increases rollover risk and adds volatility to interest expenses.

On the demand side, Dalio said foreign investors hold roughly 32% of Treasuries and the Fed about 14%, with support moving toward domestic buyers. He singled out China and Japan as the crucial holders to monitor. Worries about US debt, a shift into gold, and sanctions fears are curbing Chinese demand, while Japan has reasons to bring capital home to bolster the yen and its bond market. This could disrupt currency-hedged carry trades. Middle Eastern oil exporters are also purchasing fewer US Treasuries, according to Dalio.

Debt service forms the second pressure point. Dalio stated the existing debt carries an average rate of about 3.5%, compared with market rates between 4% and 5.5%, meaning interest costs will keep increasing as debt matures even without further rate hikes. A 1 percentage point increase would eventually add roughly $310 billion annually in interest. Including principal rollovers, total debt service stands at about 200% of government revenue.

Dalio emphasized that Treasury competes with a wave of corporate borrowing inspired by AI investment. He projects total US net fixed-income financing requirements at roughly $4.4 trillion in 2027. He called hyperscaler bond issuance—which hit about $220 billion in the first half of 2026 versus about $108 billion in all of 2025—the canary in the coal mine. Increasing capital expenditure is already eating into free cash flow and widening credit spreads.

Equity supply is also soaring. Dalio said issuance reached a $1.8 trillion annualised rate in the first half, fueled by AI-related IPOs, secondary offerings, and private capital raising. Worldwide, OECD governments project gross borrowing of about $18 trillion in 2026. Dalio summed up that the supply of financial assets seems far greater than what demand can soak up, adding that his views do not constitute investment advice.