As concerns mount over rising interest rates and inflation levels, billionaire investor Ray Dalio says he prefers to hold cash for now, not bonds.

“I don’t want to own debt, you know, bonds and those kinds of things,” the founder of Bridgewater Associates said when asked how he would deploy capital in today’s investment environment.

“Temporarily, right now, cash I think is good … and the interest rates are fine. I don’t think [it] will be sustained that way,” Dalio told an audience at the Milken Institute Asia Summit in Singapore on Thursday.

Dalio’s comments come as the yield on the 30-day U.S. Treasury bill climbs above 5% while investors can get 4% on certificates of deposit and high-yield savings accounts.

Dalio says the biggest mistake that most investors make is “believing that markets that performed well are good investments, rather than more expensive.”

When asked how a new industry watcher should deploy capital, Dalio’s advice was: Be in the right geographies, diversify, pay attention to the implications of disruptions and pick asset classes that are creating new technologies and using them “in the best possible way.”

Touching on how to address the rising global debt, the hedge fund manager pointed out that when debt accounts for a substantial share of a country’s economy, the situation “tends to compound and accelerate … because you have to have interest rates that are high enough for the creditor and not so high that they are harming the debtor.”

“We’re at that turning point of acceleration. But the real problem comes when individuals or investors don’t hold the bonds, because it comes as a supply-demand, one man’s debts or another man’s assets,” he explained.

Dalio cautioned that investors will sell their bonds if they are not receiving real interest rates that are high enough.

“The supply-demand [imbalance] isn’t just the amount of new bonds. It’s the issue of ‘do you choose to sell the bonds?'” he explained.

When there’s a sell-off in bonds, prices fall and yields rise, as they have an inverse relationship. As a result, borrowing costs will increase and drive up inflationary pressure, thereby posing an uphill task for central banks.

“When the interest rates go up, the central bank then has to make a choice: Do they let them go up and have the consequences of that, or do they then print money and buy those bonds? And that has inflationary consequences,” Dalio explained.

“We’re seeing that dynamic happen now. I personally believe that the bonds longer term are not a good investment,” he stressed.

LONDON — The Bank of England told lawmakers that a number of pension funds were hours from collapse when it decided to intervene in the U.K. long-dated bond market last week.

The central bank’s Financial Policy Committee stepped in after a massive sell-off of U.K. government bonds — known as “gilts” — following the new government’s fiscal policy announcements on Sept. 23.

The emergency measures included a two-week purchase program for long-dated bonds and the delay of the bank’s planned gilt sales, part of its unwinding of Covid pandemic-era stimulus.

The plunge in bond values caused panic in particular for Britain’s £1.5 trillion ($1.69 trillion) in so-called liability-driven investment funds (LDIs). Long-dated gilts account for around two-thirds of LDI holdings.

Many LDIs are owned by final salary pension plans, workplace pensions popular in the U.K. that provide a guaranteed annual income for life upon retirement, based on the worker’s final or average salary.

The LDIs needed to liquidate substantial portions of their long-term gilt positions as the values of the bonds fell early last week, and could have done so in an orderly fashion providing gilt prices did not deteriorate too rapidly.

In a letter Wednesday to Conservative Party lawmaker Mel Stride, chairman of the Treasury Select Committee, Bank of England Deputy Governor Jon Cunliffe revealed that LDIs issued dire warnings on the evening of Sept. 27, as 30-year gilt yields rose by 67 basis points from their position that morning. Yields move inversely to prices.

“The Bank was informed by a number of LDI fund managers that, at the prevailing yields, multiple LDI funds were likely to fall into negative net asset value. As a result, it was likely that these funds would have to begin the process of winding up the following morning,” Cunliffe said.

“In that eventuality, a large quantity of gilts, held as collateral by banks that had lent to these LDI funds, was likely to be sold on the market, driving a potentially self-reinforcing spiral and threatening severe disruption of core funding markets and consequent widespread financial instability.”

Bank of England staff worked through the night on Tuesday, Sept. 27 to come up with an intervention that would avert this potential crisis, in “close communication” with the U.K. Treasury, which agreed the next morning to indemnify the bank’s rescue operation.

The 30-year gilt yield fell more than 100 basis points after the bank announced its emergency package on Wednesday Sept. 28, offering markets a much-needed reprieve.

Cunliffe noted that the scale of the moves in gilt yields during this period was “unprecedented,” with two daily increases of more than 35 basis points in 30-year yields.

“Measured over a four day period, the increase in 30 year gilt yields was more than twice as large as the largest move since 2000, which occurred during the ‘dash for cash’ in 2020,” he said.

“It was more than three times larger than any other historical move. Gilt market functioning was severely stretched, particularly at the long end of the curve.”

The European Central Bank toughened its anti-inflationary stance with a 50 basis point hike to interest rates and announced a new anti-fragmentation tool, but analysts are unconvinced that these measures will tackle the euro zone’s myriad of economic challenges.

The 50 basis point increase to the key rate on Thursday was broadly well received by the market and commentators, with inflation running at a record high in the 19-member common currency bloc and the ECB lagging behind its peers in kickstarting the process of monetary tightening.

However, the aggressive move comes against a backdrop of slowing growth and risks tipping the economy into recession, as the external pressures arising from the war in Ukraine and associated energy supply concerns show little sign of abating.

An unexpected contraction of July’s euro zone PMI (purchasing managers’ index) readings on Friday will only serve to further these concerns. Capital Economics said the new data suggests “the euro zone is teetering on the brink of recession due to slumping demand and rising costs.”

The Frankfurt-based institution also launched the Transmission Protection Instrument (TPI), an anti-fragmentation tool aimed at supporting nations with large debt burdens and high borrowing costs, like Italy, and limiting discrepancies among euro zone member states.

The TPI can be activated to counter “unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area,” the ECB said.

Details released later on Thursday showed that the tool could be used when certain countries see surging borrowing costs due to factors beyond their control, providing those countries had stuck to “sound and sustainable fiscal and macroeconomic policies.”

However, the hazy nature of the new tool’s application, and its place in the contemporary function of monetary policy, have raised more questions than answers for many analysts.

TPI – addressing the symptom rather than the cause

Clemens Fuest, president of Germany’s Ifo Institute for economic research, said in a statement Friday that he welcomed the surprisingly large increase to the key interest rate, but criticized the effort to limit the gaps between the borrowing costs of different nations.

“Interest rate differentials are part of a functioning capital market because they reflect different levels of risk, and private investors need to be convinced to take those risks,” Fuest said.

“There is a danger that the ECB is crossing the line into financing governments here, jeopardizing its independence and setting the wrong incentives for fiscal and economic policy.”

He argued that if individual member states enter financial difficulties, it is not the ECB’s job to intervene, but rather that of euro area governments and the ESM (European Stability Mechanism) bailout fund.

The ESM has disbursed funds to support the likes of Spain, Greece, Portugal, Cyprus and Ireland in recalibrating their finances since its inception in 2012 through loans and other forms of financial assistance.

“The conditions defined by the ECB that a country must fulfill in order to receive financial support from the ECB are significantly weaker than those of the OMT bond-buying program introduced during the euro crisis, which requires at least an ESM program with far-reaching conditions,” Fuest added.

He suggested that in contrast to the OMT (Outright Monetary Transactions) program – in which under certain conditions, the ECB makes secondary purchases of sovereign bonds issued by euro zone member states – the ECB is not bound by any decision from other institutions in its TPI program, which leaves it vulnerable to political pressure to offer fiscal support to debt-laden member states.

Fuest’s skepticism was echoed by Shweta Singh, senior economist at Cardano, who said in a note Thursday that the TPI’s deployment is subject to “a whole lot of ECB-style constructive ambiguity.”

“The eligibility, activation and termination criterions are all open to judgment and General Counsel discretion. The timing of the announcement of the TPI has coincided with the widening of BTP-Bunds spreads on the back of heightened political instability in Italy and raises a few interesting questions,” Singh said.

The spread between Italian and German bond yields is seen as a measure of stress in European markets – or a fear gauge – and has widened in recent months to its highest level since May 2020.

Renewed political instability in Italy following the resignation of Prime Minister Mario Draghi, giving way to another national election on Sep. 25, has further damaged investor confidence.

Singh said the key questions would be whether the ECB would act when spreads widen due to political concerns, as is the case now, and how the Governing Council would define an “unwarranted” widening of spreads.

“In any case, we think the TPI is more likely to address the symptom (wider spreads, higher risk premia) rather than the cause (underlying differences in competitiveness, growth potential, debt levels, fiscal governance) and may have a muted impact on keeping spreads lower for longer,” she said.

“In the absence of concrete details, we think markets will test the ECB and while the approval of the TPI was unanimous, the implementation will be rife with concerns about monetary financing.”

Despite the haziness surrounding the TPI’s application, however, several analysts deemed it “credible” for the time being.

BNP Paribas Senior European Economist Spyros Andreopoulos said in a note Thursday that the TPI “looks credible to us in the medium term, based on the combination of ECB discretion and no ex-ante limit.”

“However, the threshold for activation is likely high, suggesting the markets could still test the ECB in the short term,” he added.

UBS Chief Eurozone Economist Dean Turner and Head of Credit Thomas Wacker also acknowledged the lack of detail, but said the “broad outline of the TPI seems to have bought the ECB enough credibility in the eyes of investors.”

“The true test will come when conditions deteriorate to the point that the ECB has to use the TPI, something they hope that its very existence will prevent,” UBS said.