Prince of Bridgewater warns of risky assets after bond fall

The world’s largest hedge fund warns that the recent sale of U.S. government bonds could accelerate, in a shift that threatens high-flying assets, including blank check companies and cryptocurrencies.

Bob Prince, who heads Bridgewater Associates with Ray Dalio, told the Financial Times that a new phase of the $ 21 billion Treasury market downturn looms as economic growth improves and inflationary pressures push the market down. Federal Reserve to consider reversing its stimulus measures.

The rally in risky assets, which has been going on for almost a year, “really depends on it. . . whether [the Fed] runs into constraints, “Prince said,” which will typically be inflation, currency deflation or call it bond vigilantes, where people just say, “Hey, forget that. With so much [money] printing, I just don’t want to own any bonds. “

Inflation expectations have picked up this year, reaching the price of US government bonds and increase their yields. This has already hit fast growing tech companies like Netflix, Amazon and Tesla as their high valuations have been supported by low rates.

The Bridgewater executive said he also believes in the boom special purpose acquisition companies and the soaring crypto-currencies as bitcoin was a “manifestation of this environment” created by the loose monetary policy of the US central bank and the stimulus provided by Congress.

Fed policymakers have ruled out the Treasury liquidation as a healthy reaction to the burgeoning US economic recovery. But Prince said investors could face problems as the central bank reacts to higher long-term yields.

“Is the Fed coming to print money and buy bonds to keep bond yields from rising in this environment?” He asked. “And with rising inflation the economy is doing better and bond yields going up, are they keeping it from going up or are they letting it go?” If they control the yield curve, are they risking the dollar? “

“Either way, it hurts you,” Prince added. “Either bond yields go up or the dollar goes down. This is the risk of the second stage of a bond movement. “

Foreign investors, among the biggest buyers of Treasuries after the Fed, have already shown less appetite for U.S. sovereign debt as their losses have piled up, traders say. The 10-year Treasury yield climbed above 1.6 percent this week, from 0.9 percent at the end of last year. This resulted in the worst quarter for Treasury investors in more than four years, according to Ice Data Services.

Line chart of the average bond price in the ICE BofA Treasury Index (cents per dollar) showing Treasury prices slipped as the US recovery gained momentum

Prince – co-chief investment officer of Bridgewater, which manages $ 150 billion in assets – said he was also troubled by the growth of index investing. With low rates leaving yield-hungry investors with few alternatives to stocks, he said, index funds were paying increasingly higher prices for stocks with lower future returns.

“It sounds like a Ponzi scheme,” he said, “because if you can sell it to someone else that’s fine, but what if you can’t? not.”

His criticisms echo a Financial Times editorial published last month by a seller of short films Carson Block warning that passive investing posed a global economic risk. Block and other investors have pointed out that as a result of their strategies, index funds hold shares of companies like GameStop which have soared to record levels this year.

Prince said Bridgewater’s performance was “fairly close to breakeven” in 2021. Its funds include All Weather, a passive strategy that invests in a variety of markets, weighted by their volatility, and Pure Alpha, a macro plus fund. traditional which makes bets on the direction of stocks, bonds, currencies and commodities.

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