Ray Dalio, founder of Bridgewater Associates, recently warned that the multi-year decline in the U.S. Treasury market is far from over. In his view, the ballooning supply of U.S. government debt is colliding head-on with the waning appetite of major global institutional investors, creating increasingly severe supply-demand imbalances and putting immense pressure on the market.

This year, the U.S. Treasury faces a massive funding gap. It not only needs to refinance roughly $10 trillion in maturing debt but also must issue an additional $2.1 trillion in new bonds to cover the fiscal deficit. Dalio points out that this massive scale of debt issuance is fueling a self-reinforcing vicious cycle: a surge in debt issuance pushes up bond yields, which in turn drives up the government's interest expenses, ultimately forcing the authorities to issue even more debt. Currently, both the overall U.S. debt level and the ratio of interest payments to tax revenue have climbed to their highest levels since the end of World War II.

While the supply side is expanding wildly, the demand side is showing signs of fatigue. As major overseas holders of U.S. Treasuries, Japan and China are losing interest in purchasing them. With domestic interest rates rising in Japan, Japanese capital is increasingly inclined to flow back home to support the yen and the domestic bond market, meaning its holdings of approximately $1.1 trillion in U.S. debt assets could face contraction. China is also continuously adjusting its foreign exchange asset allocation, leading to shifting demand for U.S. Treasuries. Meanwhile, the massive fundraising by U.S. tech companies for AI infrastructure construction is competing with the Treasury for market liquidity, further exacerbating the oversupply in the bond market. Dalio also noted that the widening of corporate bond yield spreads could be an early signal that the market is demanding higher risk premiums.

Driven by these factors, the fixed-income market is undergoing a severe test. The Bloomberg U.S. Treasury Index has fallen by about 2.4% year-to-date. Against the backdrop of economic resilience and energy market volatility pushing up inflationary pressures, the yield on the benchmark 10-year U.S. Treasury note once touched a nearly 25-year high of around 5.4%.

Faced with the current market landscape, Wall Street institutions are showing clear divisions. Major asset management firms like BlackRock and Morgan Stanley believe that U.S. Treasuries have become attractive investments given the rare high yield levels not seen in decades. Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley, even stated that equity market volatility needs to catch up with bond market volatility to complete the ultimate market washout. However, Dalio disagrees. He has consistently favored gold over government bonds. He insists that the U.S. Treasury bear market will continue until the structural debt issues are resolved, and the market will only truly stabilize when high borrowing costs significantly curb economic activity, thereby rebalancing bond supply and demand. In the current macroeconomic environment, investors should remain cautious about U.S. government debt rather than blindly allocating large amounts for the long term.