Ray Dalio, the founder of Bridgewater Associates, has expressed concerns that the recent downgrade of the U.S. credit rating by Moody’s does not fully capture the risks associated with U.S. Treasurys. Dalio believes that the federal government printing money to pay off its debt could lead to a depreciation in the value of the currency, resulting in losses for bondholders. According to Dalio, credit ratings primarily reflect the risk of the government failing to pay its debt, but they do not consider the more significant risk of inflation caused by excessive money printing.
He stated, “Credit ratings understate credit risks because they only rate the risk of the government not paying its debt. They don’t include the greater risk that countries in debt will print money to pay their debts, thus causing holders of the bonds to suffer losses from the decreased value of the money they’re getting.”
Moody’s downgraded the U.S. credit rating to Aa1 from Aaa on Friday, citing the federal government’s increasing budget deficit and rising interest payments on debt. This move followed similar actions by other major credit rating agencies.
The financial markets reacted to the downgrade with rising yields. The yield on the 10-year Treasury note climbed to 4.521%, while shorter-term rates also saw significant increases.
Dalio highlights overlooked inflation risk
Dalio emphasized, “For those who care about the value of their money, the risks for U.S. government debt are greater than the rating agencies are conveying.”
Bridgewater Associates, one of the world’s largest hedge funds, experienced an 18% decline in its assets under management in 2024, falling to approximately $92 billion from a peak of $150 billion in 2021. The downgrade and concerns about U.S. debt have added to the uncertainty in financial markets, which have been relatively calm since President Trump paused many of his tariffs in recent weeks. The tax cut legislation and broader concerns about the fiscal deficit and growing debt costs have further contributed to these worries.
As the U.S. national debt reaches $36 trillion, economists fear that recent fiscal proposals could push the deficit higher by cutting taxes. Moody’s criticized U.S. politicians for not taking action to improve the country’s fiscal position, stating, “Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.”
While some investors believe the downgrade’s market impact will be contained, others suggest that investors may demand higher yields on Treasurys as a result. The White House communications director, Steven Cheung, criticized the downgrade, claiming that the economist for Moody’s is biased against President Trump.
However, some investors argue that the U.S. cannot be forced to default on its debt, as it issues the U.S. dollar and controls the global reserve currency. Stephen Innes, the managing partner at SPI Asset Management, stated, “Let’s get real. If there’s one asset on this planet with the least chance of default, it’s a U.S. Treasury bond.”
