Ray Dalio, founder of Bridgewater Associates, the world’s biggest hedge fund, suggested that the volatility of the indices across US markets signals a possibility in interest rates rising sooner than investors expected. Policy makers have already begun discussing the gradual slowdown of monthly asset purchases.
The yield curve flattened, with short and medium-dated yields increasing last week as long-term yields fell. The dollar increased while equities fell, but on Monday these moves partially reversed with the Dow Jones Industrial Average (DJIA) in green by more than 500 points, or 1.7%, while the S&P 500 (SPX) gained 1.3%.
Dalio added in a conversation with economist and former Treasury Secretary Lawrence Summers at the Qatar Economic Forum, that “monetary inflation” will be inevitable as a result of overflowing bond issuances.
U.S. deficits will soar, and the government will “have to sell a lot of bonds” to investors of such assets, despite the unattractive low-interest rates and negative real inflation rates.
“That creates a supply/demand situation that can bring monetary inflation because there will not be enough demand to buy those bonds,” Dalio said. As a result, the Fed won’t be able to taper or cut back on its own purchases of bonds and may have to actually step up those purchases to prevent interest rates from rising, he said.
How will this affect home sales, future of stock market, US dollar?