In a recent video, founder of Bridgewater Associates Ray Dalio warns that the market could see “a terrible imbalance,” according to an article in Yahoo! Finance. During the era of extremely low rates, banks would borrow inexpensively and then invest that money. But now, as rates were hiked up and continue to remain high, all the assets that were bought with borrowed money are losing value, and those investments aren’t producing the same high returns they were when rates were low. As a result, Dalio says, “you have everybody losing money.” And it’s not just a problem in the U.S., he contends—it’s a global situation.
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Now, central banks must walk a fine line where interest rates are high enough to combat inflation, but low enough that those who borrowed to invest aren’t hit too hard. Meanwhile, in order to fill budget deficits, the federal government will need to borrow money by selling off debt through means such as U.S. Treasurys, but those who buy it need to see high enough returns in order to invest. If they don’t, “they can sell the debt…rather than buying that debt. And that creates a terrible imbalance,” Dalio says, the article reports.
However, higher interest rates can also drag down bonds, possibly to the point where they are sold off at market value instead of being held until they mature. That’s what caused the $1.8 billion loss that led to Silicon Valley Bank’s collapse, and it’s something we could see more of, according to Dalio. “If you mark to market, a lot of entities are in financial difficulty,” he warns in the video’s conclusion.
