Our blog earlier this week about multi asset investing referred to the ‘All-weather’ portfolio made famous by celebrated hedge fund manager Ray Dalio of Bridgewater Associates. Dalio is also known for his books most notably Principles: Life and Work.But his 2021 book on The Changing World Order, popularised the phrase that is often used to describe today’s geopolitical situation quite tellingly. Underpinning the book’s central message is his illustration of long-term debt cycles, which he double clicked on in his 2025 book How Nations Go Broke . The book has now become compulsory reading given how a lot of what was in the book is playing out now – rising concerns on sovereign debt levels especially in the rich world, most notably US, Japan and France. In this blog, Dalio shares some numbers for the US debt situation – how its growing level amidst dwindling demand raises severe concerns.
He begins with his hypothesis on when countries go broke:
1. “The supply of debt to be sold is much larger than the demand for it and/or
2. Debt service payments (i.e., interest and principal payments) rise relative to incomes to levels that painfully squeeze out other spending.
Both of these things are now happening and are projected to happen increasingly.
Classically, these circumstances a) raise interest rates, tighten credit, hurt equity and other markets, and reduce borrowing and economic activity and/or b) lead governments to accommodate more money and credit creation to temporarily alleviate the debt, which devalues money and pushes the problem down the road. Most typically, debt and debt service payments are reduced relative to incomes through a combination of debt restructuring and debt monetization, and as a result, money and debt decrease in value. In any case, this dynamic is bad for the holders of debt assets.”
He shares a lot of numbers that illustrate the deteriorating supply/demand situation for US government bonds and growing debt service (principal repayment and interest expenses) requirements relative to US tax revenue:
• Govt debt level at 600% of govt revenue – highest since WW II
• Govt interest expense at 20% of govt revenue – highest since depression of the 1930s
• Govt debt rolls (or refinancing) at 180% of govt revenue (taxes) – on track to become the highest ever
• Total govt debt service (principal + interest) at 200% of govt revenue – on track to become the highest ever
He shows the refinancing will only exacerbate as the duration of US debt has been shortening: “In the past, Treasury typically targeted issuing about 20% of outstanding debt in bills, shifting issuance toward bills during recessions when spending needs to spike and away from them later in the cycle. The current pace of bill issuance (which is also the projected pace in 2027) is about 50% of total expected issuance. This is unusual except in periods of recessions and periods when long-term debt is difficult to sell.” In general, debt levels rise during a crisis (economic, war, pandemic, etc) when the government needs to bail out the economy. But these are peace times, when the economy is being boosted by the AI capex boom.
“These are the projections for “normal” conditions. The supply of borrowing will increase faster if there is economic weakness as the government typically steps in with counter-cyclical borrowing and spending. For example, a moderate to severe recession (e.g., -4%) would probably roughly double the deficit.”
All this while the demand for US debt is dwindling: “foreigners as a whole are the largest holders of the stock of debt, with 32% of the debt, and the Fed is the next largest holder at 14%. Together, they own nearly half while Americans of all sorts own a bit more than half. You can see by comparing the percentage of holdings with the recent percentages of their purchases in 2025-26 that the support for the Treasury market has been shifting away from foreigners to domestic buyers. In 2025, the Fed let a bit of its holdings decline and has recently picked them up again; also, the American public’s ownership and purchases have picked up, which they typically do when interest rates rise. Clearly, it is the American public who are most exposed and are now experiencing losses in their bond holdings.”
Among the foreigners, China and Japan are the biggest holders (thanks to their trade surplus proceeds reinvested in bonds for decades) and both their incentives have shifted from accumulating to reducing their holdings of that debt.
In China’s case: “The official accumulation of dollar assets has decreased due to concerns over a) US debt and other conditions, b) the government’s diversification toward other reserve assets including gold, and c) the increased risks of the US weaponizing debt (i.e., deciding not to pay its debt, as happened to the Japanese prior to World War II and has recently happened to current US enemies).”
For Japan, “JGB [Japanese Govt Bonds] yields rose relative to US Treasury yields, lessening the disincentives of holding JGBs with both low relative yields and a falling currency. These influences favor further Japanese selling of US debt and the repatriation of money into Japanese yen debt assets.”
The latter illustrates the unwinding of the ‘carry trade’ (borrowing cheap in Japan to invest in higher yielding assets) as Japanese interest rates rise.
Dalio shares a lot of numbers (some estimated) and implications on other markets including international bonds and global equities from the US debt situation. Worth reading in its entirety.
Note: Microsoft Corporation (LinkedIn) is part of the holdings within the Marcellus Global Compounders Portfolio, a strategy offered by the IFSC branch of Marcellus Investment Managers Private Limited and regulated by the IFSCA. Accordingly, Marcellus, its employees, their immediate relatives, and clients may maintain interests or positions in this security. Any reference to this company is intended strictly for informational and educational purposes within the context of this discussion and should not be construed as investment advice.
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