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Ray Dalio, founder of the world’s largest hedge fund, says the economics of investing in bonds have become “stupid” and that U.S. overborrowing is pushing investors into relatively more attractive Chinese bonds instead.

U.S. bond issuance has ramped up to fund measures to combat the pandemic with volumes in 2021 slated to rise to US$4-trillion this year, according to ING. Bond yields, meanwhile, have come off historic lows with the benchmark 10-year last around 1.6 per cent.

Bridgewater Associates founder Mr. Dalio, in a LinkedIn post titled Why In The World Would You Own Dollar Debt?, said the world owns too many bonds.

At the same time, governments – particularly the United States – are adding to that pile of debt.

Taking inflation into account makes bonds an even worse investment, he wrote.

He cautions that policy-makers who are short of money may raise taxes, which could drive capital out of debt assets and into other assets and tax domains, ultimately leading to curbs against capital movements to assets such as gold and bitcoin.

“These tax changes could be more shocking than expected,” Mr. Dalio said.

Bonds have been in a 40-year bull market, which means a lot of investors that are long the asset have not been seriously stung by a price decline.

There is now a rotation away from U.S. to Chinese bond markets, which he says are more compelling owing to their increasing openness to foreign investment, relatively attractive yields and the internationalization of the yuan.

Mr. Dalio, who has in the past cautioned about the impact of deficits on the U.S. dollar’s reserve currency status, advises investors diversify portfolios of non-debt and non-dollar assets rather than a traditional stock/bond mix that is heavily skewed to U.S. dollars.

Cash “is and will continue to be trash,” he wrote, meaning it will “have returns that are significantly negative relative to inflation.”

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