Dalio Warns of Potential U.S. Debt Crisis as Japan and China Exit Treasuries

Ray Dalio, founder of Bridgewater Associates, has warned of a potential U.S. debt crisis within three years due to shifting dynamics in the Treasury market. In an interview with Bloomberg TV, Dalio highlighted that Japan and China, the largest foreign holders of U.S. debt, are unlikely to continue expanding their holdings. He noted that geopolitical tensions and economic factors are driving this change, particularly in China, where reducing exposure to U.S. financial assets is part of a broader diversification strategy.

Japan, meanwhile, is rebalancing its portfolio amid a surge in the attractiveness of its own government bonds. The 10-year Japan Government Bond yield has approached 3.3%, making it more appealing than hedged U.S. Treasuries, especially with dollar-yen hedging costs near 2.9%. Dalio emphasized that this structural shift could lead to higher borrowing costs for the U.S. government as it seeks to fund its budget deficit.

The U.S. Treasury market has been volatile, with the 10-year yield trading near its highest level since 2002. Dalio also pointed to funding pressures at large technology companies investing in artificial intelligence, citing Oracle's recent bond issuance and funding challenges related to its acquisition of Warner Bros. Discovery as examples. Meanwhile, the global bond market faces additional risks, including France's deteriorating fiscal position and Japan's monetary policy shift.

Despite reassurances from U.S. Treasury Secretary Scott Bessent about economic growth and spending restraint, Dalio's warnings underscore ongoing concerns among investors. The potential exit of Japan and China from the U.S. Treasury market could further complicate the U.S. government's ability to manage its debt, adding another layer of uncertainty to the global financial landscape.