Ray Dalio Warns Rising Bond Yields Could Put Stocks in Danger — Says Corporate Cash Flow Is ‘Deteriorating’ Even as Earnings Grow

Bridgewater Associates founder Ray Dalio warned that rising bond yields could eventually undermine equities, arguing that corporate earnings growth has so far offset higher rates but is losing its capacity to do so. Speaking with CNBC on a Thursday at the Milken Institute Asia Summit in Singapore, Dalio said stocks have remained resilient because earnings have maintained a favorable expected-return gap versus bonds. However, rising stock prices and higher yields are eroding equities' relative appeal, leaving the market less able to absorb further rate increases. "Because of that change in pricing, that cushion has come down, and so now you're starting to see credit spreads start to widen," Dalio said.

Dalio also flagged that corporate free cash flow could be deteriorating even as headline earnings improve, urging investors to look beyond reported profits. He cautioned that companies investing heavily without generating adequate cash could face liquidity pressures, but he did not predict an earnings decline or an imminent market correction, noting that financial conditions have not tightened enough to significantly curb credit and spending.

On fixed income, Dalio said borrowing needs are likely to stay elevated as governments fund fiscal deficits and companies invest in emerging technologies, potentially adding upward pressure on rates. "We are in a bond bear market, that's I think, pretty clear, and I think that there's more to go would be my guess," he said. He added that higher borrowing costs could eventually restrict credit and consumer spending, slowing economic activity and adding strain to equity markets.

The warning coincided with a sharp move in Treasuries. According to Benzinga, the benchmark 10-year Treasury yield surged to its highest level since April 2002 earlier in the week before dropping to 5.229% on Thursday, while the 30-year yield fell to 5.602% following a recent 24-year high. Dalio's comments extend his August recommendation that investors reduce long-duration bond exposure and consider allocating 10% to 15% of portfolios to gold, with a smaller Bitcoin position. At that time he suggested a U.S. debt crisis could emerge in roughly three years, "give or take two," if policymakers failed to reduce the fiscal deficit. Separately, he said foreign investors, who fund nearly a third of U.S. borrowing, could push yields higher if they reduce Treasury purchases, citing China's slowing U.S. debt accumulation and Japan's efforts to recover funds lent to Washington.