Joining the likes of Bill Gross and Jeffrey Gundlach, and echoing his ominous DV01-crash warning to the NY Fed from October 2016, Bridgewater’s billionaire founder and CEO Ray Dalio told Bloomberg TV that the bond market has “slipped into a bear phase” and warned that a rise in yields could spark the biggest crisis for fixed-income investors in almost 40 years.
“A 1 percent rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981,” Bridgewater Associates founder Dalio said in a Bloomberg TV interview in Davos on Wednesday. We’re in a bear market, he said.
Readers may recall that when addressing the NY Fed in October 2016, Dalio made virtually the same prediction when he commented on the bond market’s DV01:
… it would only take a 100 basis point rise in Treasury bond yields to trigger the worst price decline in bonds since the 1981 bond market crash. And since those interest rates are embedded in the pricing of all investment assets, that would send them all much lower.
Dalio is referring to the record DV01 in the bond market, which according to the latest OFR report released in December, has risen to $1.2 trillion: that’s the P&L loss from a 100bps rise in rates.
The watchdog found that “valuations are also elevated” in bond markets. Of particular interest is the OFR’s discussion on duration. Picking up where we left off in June 2016, and calculates that “at current duration levels, a 1 percentage point increase in interest rates would lead to a decline of almost $1.2 trillion in the securities underlying the index.”
However, as we explained last December, this is a low-ball estimate which “understates the potential losses” as it “does not include high-yield bonds, fixed-rate mortgages, and fixed-income derivatives”, which would suggest that the real number is likely more than double the estimated when taking into account all duration products. As a reminder, Goldman calculated the entire duration universe at $40 trillion as of the summer of 2016, resulting in $2.4 trillion in losses for a 1% move. By now the number is far, far greater.
Echoing what he said on CNBC yesterday, Dalio said that The current economic environment is good for stocks but bad for bond investors.
“It feels stupid to own cash in this kind of environment. It’s going to be great for earnings and great for stimulation of growth.”
Following Dalio’s remarks, Treasury yields spiked and are legging higher again, back above 2.65%.