Billionaire hedge fund manager Ray Dalio said that the bond market has slipped into a bear phase and warned that a rise in yields could spark the biggest crisis for fixed-income investors in almost 40 years.
"A 1% rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981," Mr. Dalio, founder of Bridgewater Associates, said in an interview in Davos on Wednesday. We're in a bear market, he said.
A Treasury market sell-off extended following Mr. Dalio's comments, pushing 10-year yields through 2.65%, near the highest since mid-2014.
Mr. Dalio predicted that the Federal Reserve will tighten monetary policy faster than policy makers have signaled, and said that economic growth is in the late stage of the cycle but could continue to improve for another two years. The current economic environment is good for stocks but bad for bond investors, said Mr. Dalio, who's chairman of Bridgewater, the world's biggest hedge fund.
"It feels stupid to own cash in this kind of environment. It's going to be great for earnings and great for stimulation of growth," he said.
That spurt will last for about 18 months and the central bank will then feel like it has to tighten monetary policy faster than the discounted yield curve, he said. That will be a negative for asset prices, he said.
Demand for bonds will fall as central bankers reduce monetary stimulus, but larger deficits mean that governments will need to sell more of the securities to raise money, Mr. Dalio said. That supply-demand imbalance will concern the central bankers, he said.
Bridgewater manages about $160 billion, according to its website.