Investor Ray Dalio warned that the United States faces a “death spiral” due to an oversupply of government debt. This structural imbalance is materializing as the U.S. Treasury struggles to contain rising yields despite escalating its bond buyback operations.
Supply Overwhelms Demand
Dalio outlined that countries go broke when the supply of debt surpasses demand and when debt service payments rise enough to “painfully squeeze out other spending.” He noted that both conditions are currently occurring in the U.S.
According to Dalio, increased debt pushes yields higher, which raises interest expenses and deficits, directly requiring even more debt issuance. Credit market participants refer to this compounding cycle as a “death spiral.”
The Bond Market Fights the Treasury
Dalio’s warnings align with recent Treasury market friction. In September, the U.S. Treasury tripled its long-term bond buyback operations to a $6 billion maximum to support market liquidity.
Despite this intervention, the 10-year Treasury yields climbed to multi-year highs. Market commentators like The Kobeissi Letter noted that “the bond market is quite literally fighting the US Treasury,” warning that consumers and borrowers are “in for a rude awakening” if yields continue their ascent past 5%.
Corporate Debt and Equities Face Pressure
Dalio projects that the federal government will issue $2.1 trillion in net new marketable debt over the full year of 2026. Furthermore, corporate debt and equity issuance are surging simultaneously, driven largely by artificial intelligence capital expenditures.
Dalio expects this combined wave of government and corporate issuance to create “too much supply of financial assets (both debt and equity) relative to the demand for it.”
While the economy is currently in a “mid-cycle” phase where rates have not yet crashed asset prices, Dalio anticipates that these sustained supply imbalances will eventually lead to economic weakness and negatively impact equity markets.
How Have the Stock and Bond Markets Performed?
At the last check, the 10-year Treasury bond yielded 5.20%, the 2-year Treasury bond yielded 4.78%, and the 30-year Treasury yielded 5.55%.
The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT), which tracks the ICE U.S. Treasury 20+ Year Bond Index, measuring the performance of public U.S. Treasury securities with remaining maturities greater than 20 years, closed Tuesday 0.41% higher at $78.37. It was down 10.80% year-to-date, down 3.09% over the past month and 13.47% lower over the year.
The S&P 500 index has advanced 13.81% year-to-date. Similarly, the Nasdaq Composite index was up 17.08%, and the Dow Jones gained 6.80% YTD.
On Tuesday, the SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 and Nasdaq-100, respectively, closed lower. SPY fell 0.012% to $778.01, while QQQ declined 0.33% to $743.57. Meanwhile, the Dow tracker, State Street SPDR Dow Jones Industrial Average ETF Trust (NYSE:DIA), ended 0.33% higher at $516.21.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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