Ray Dalio says the 10-year Treasury yield could rise to 5% — and there's risk it goes even higher

Published Tue, Oct 3 202311:12 AM EDTUpdated Tue, Oct 3 20231:59 PM EDT

Billionaire investor Ray Dalio believes the surging 10-year Treasury yield could rise even higher to the 5% threshold as he sees hotter inflation for longer. "It would seem that something like a 5% rate, and there's nothing precise about that, but in that neighborhood, you know, would be maybe about right … with the risk higher," Dalio said Tuesday at the Greenwich Economic Forum in Greenwich, Connecticut. The 10-year Treasury yield, which serves as a benchmark for mortgage rates, jumped to 4.76% on Tuesday, its highest level since 2007. The latest leg in bond yields came after the Federal Reserve signaled rates would stay elevated for a while to fight inflation. The founder of Bridgewater, one of the world's largest hedge funds, said the first reason for his call is he thinks a sustainable inflation rate is in the vicinity of 3.5%, higher than the 2% target for the central bank. "It doesn't look like 2% to me without a lot of pain," Dalio said. "That's also why the Fed is having its interest rates where it is. Now you have, in my opinion, something like a normal policy, a 1.5% real rate." The personal consumption expenditures price index excluding food and energy, which the Fed favors as an inflation gauge, increased 3.9% in August on a 12-month basis. Deficit risk Then Dalio said the imbalance of the government debt's supply and demand picture also caused yields to go higher. Yields and prices move in opposite directions. "We have an abnormal amount of supply in the situation in that the quantity of debt that we have to sell," Dalio said. The amount "the government has to sell is a lot. It remains a lot and the buyers are less inclined to buy the debt for a variety of reasons." The widely followed investor believes in the current environment, cash looks to be relatively appealing. Dalio had been calling it "trash" since the purchasing power of cash diminishes amid rising inflation, but he changed his position as interest rates moved much higher. "When you look at the expected returns for this moment, cash is a relatively attractive asset class at this moment," Dalio said. "It has something like a 1.5% real return … not bad in comparison to the other things, and it doesn't have price risk."

Ray Dalio, Bridgewater Associates founder, co-chairman and co-chief investment officer, at the World Economic Forum in Davos, Switzerland, on May 24, 2022.

Adam Galica | CNBC

Billionaire investor Ray Dalio believes the surging 10-year Treasury yield could rise even higher to the 5% threshold as he sees hotter inflation for longer.

"It would seem that something like a 5% rate, and there's nothing precise about that, but in that neighborhood, you know, would be maybe about right … with the risk higher," Dalio said Tuesday at the Greenwich Economic Forum in Greenwich, Connecticut.

The 10-year Treasury yield, which serves as a benchmark for mortgage rates, jumped to 4.76% on Tuesday, its highest level since 2007. The latest leg in bond yields came after the Federal Reserve signaled rates would stay elevated for a while to fight inflation.

The founder of Bridgewater, one of the world's largest hedge funds, said the first reason for his call is he thinks a sustainable inflation rate is in the vicinity of 3.5%, higher than the 2% target for the central bank.

"It doesn't look like 2% to me without a lot of pain," Dalio said. "That's also why the Fed is having its interest rates where it is. Now you have, in my opinion, something like a normal policy, a 1.5% real rate."

The personal consumption expenditures price index excluding food and energy, which the Fed favors as an inflation gauge, increased 3.9% in August on a 12-month basis.

Deficit risk

Then Dalio said the imbalance of the government debt's supply and demand picture also caused yields to go higher. Yields and prices move in opposite directions.

"We have an abnormal amount of supply in the situation in that the quantity of debt that we have to sell," Dalio said. The amount "the government has to sell is a lot. It remains a lot and the buyers are less inclined to buy the debt for a variety of reasons."

The widely followed investor believes in the current environment, cash looks to be relatively appealing. Dalio had been calling it "trash" since the purchasing power of cash diminishes amid rising inflation, but he changed his position as interest rates moved much higher.

"When you look at the expected returns for this moment, cash is a relatively attractive asset class at this moment," Dalio said. "It has something like a 1.5% real return … not bad in comparison to the other things, and it doesn't have price risk."