Ray Dalio warns: Moody's, which downgraded the U.S. rating, actually underestimated the risks of U.S. Treasury bonds

Ray Dalio, the founder of the world's largest hedge fund Bridgewater Associates, warned that even though Moody's recently downgraded the U.S. sovereign credit rating, it only reflects the tip of the iceberg regarding the risks associated with U.S. Treasury bonds. The real risks facing U.S. debt are even more severe than what Moody's downgrade suggests.

Dalio believes that rating agencies like Moody's do not take into account the risk that the U.S. federal government may resort to printing money to repay its debts. Bondholders will suffer losses due to the devaluation of their dollar investments in U.S. Treasuries, which could far exceed expectations.

On May 19, Monday, Eastern Time, Dalio posted on social media:

"Regarding the downgrade of the U.S. debt rating, you should know that credit ratings underestimate credit risk because they only assess the risk of the government not repaying its debts. They do not include the greater risk: that a debtor nation will print money to repay its debts, leading to bondholders suffering losses due to the devaluation of the currency they receive (rather than losses due to a reduction in the amount of currency received).

In other words, for those concerned about the value of their money, the risks of U.S. government debt are much greater than what the rating agencies convey."

In other words, Dalio, who has long focused on macroeconomic and debt cycles, suggests that even if the U.S. government does not technically default, investors still face substantial risks of their purchasing power being eroded by inflation.

On the day of Dalio's comments, U.S. stocks, bonds, and currencies all faced declines, but the downward trend eased during the session and did not continue the significant drop that followed Moody's downgrade announcement last Friday.

On Monday, the three major U.S. stock indices opened lower, and at the session's low, the Dow Jones Industrial Average fell about 317 points, down over 0.7%, the S&P 500 index dropped 1.05%, and the Nasdaq index fell more than 1.4%. However, the losses gradually narrowed, with the Dow turning positive and gaining as much as 187 points, up over 0.4%, while the S&P and Nasdaq briefly turned positive.

U.S. Treasury bond prices also narrowed their losses during the session, with yields rising and then falling back. The yield on the benchmark 10-year U.S. Treasury bond had briefly risen above 4.56% before falling below 4.50% in early trading.

Mark Haefele, Chief Investment Officer of UBS Global Wealth Management, stated that UBS believes the latest credit rating action is merely a risk that appears in the headlines and does not signify a fundamental shift in the market. Therefore, although this downgrade may impact some recent "good news," UBS expects it will not have a significant direct effect on financial markets.

Ross Mayfield, an investment analyst at Baird, noted that Moody's report did not highlight anything that investors were unaware of regarding the U.S. fiscal situation. "In my view, it simply provides the market with a bit of breathing room but will not structurally change our optimistic outlook for the next 6 to 12 months."