The fall in bond prices and rise in yields ‘reflects a supply-demand problem’ for gilts

Britain may need to borrow increasing amounts to service rising interest costs, creating the danger of “debt death spiral,” according to Ray Dalio, founder of hedge fund Bridgewater Associates.

Speaking to the Financial Times, billionaire Dalio reportedly said that a recent selloff in U.K. government bonds was notable because it coincided with a falling British pound alongside cooler inflation and economic-growth data.

The rise in gilt yields when the economic data pointed to possibly more interest-rate cuts by the Bank of England implied the market was balking at the prospect of more bond issuance.

This “looks like a debt death spiral in the making because it will either require more borrowing to service the debt that will have to be serviced, squeeze out other spending, or require more taxes,” Dalio was quoted as having told the FT.

The fall in bond prices and rise in yields “reflects a supply-demand problem” for gilts, he said. “Why else would long-term [yields] rise when there’s an easing [of monetary policy], the exchange rate is going down, and the economy is weak?”

The 10-year gilt yield last week brushed 4.90%, its highest level since 2008, partly in response to concerns the U.K. government would have difficulty matching it’s spending commitments if the economy continued to struggle.

However, much of the rise in gilt yields of late matched surging U.S. Treasury yields amid fears that the new Trump administration’s import tariff and immigration plans may stoke inflation, and that the government budget position of the world’s biggest economy is also dire.

The recent sell-off in the Treasurys suggested the U.S. was “exhibiting signs” that the market could start to struggle to absorb its borrowing needs, too, Dalio told the FT. Tackling the U.S. debt burden should be “first big issue” for President Trump’s new term in office, Dalio added.

On Tuesday, the 10-year gilt yield

TMBMKGB-10Y

4.640%

dipped 0.5 basis points to 4.658%, while the equivalent duration Treasury yield

TMUBMUSD10Y

4.628%

fell 5.6 basis points to 4.574%. The greater fall in Treasury yields came because the U.S. bond market was shut on Monday for the Martin Luther King Jr. holiday, and European debt had rallied after Trump did not immediately announce tariffs on taking office.