A former executive of the hedge fund founded by billionaire Ray Dalio is warning that the market for US debt will soon hit a rough spot.
In a new CNBC Television interview, ex-Bridgewater Associates chief investment strategist Rebecca Patterson addresses how the US dollar has lost about 10% of its value year-to-date, its worst performance in over 50 years.
“I think there are three main things driving the dollar [devaluation]. One is slightly lower frontend rates, interest rates over this period because currencies trade on rate differentials.Â
But I think more importantly and what’s different this time is that you’re seeing both re-allocation out of the US both by Americans diversifying and foreigners pulling back slightly. And then third and really importantly is hedging. So let’s say I’m a large overseas pension fund, and I have a tech equity exposure, and I want to keep it because I believe in the structural story, but I’m nervous about the dollar, I’m nervous about the Fed’s independence, I can hedge out that currency risk.Â
So even if money stays in US equities, which helps explain where we are today, you can still see that dollar weakness.”
Patterson, who is now the chair of the Council of Economic Education, warns that the dollar devaluation will continue as investors hedge and move their capital elsewhere. She also notes that the ongoing capital re-allocation will negatively impact demand for US debt.
“This isn’t going to be a one-off. This is going to be a slow bleed out of the dollar, and I believe slowly out of US Treasuries.”
Looking closer at US Treasuries, Patterson warns that she sees the bond market facing a demand shortage in the coming months.
“I think this is rather a slow bleed. Most of the foreign investors who have US Treasuries have them in very short tenure bonds, so three years and less. They just have to let them expire and not replace them, so let them roll off.Â
Again, it’s not going to be a one-and-done event, I think, without a trigger. It’s just going to be: we don’t have the demand to meet the supply that’s going to be coming, I think early next year.”Â
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