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Bridgewater unveils new bets against US and European corporate bonds

Ray Dalio’s hedge fund is once again putting its money where its famous founder’s mouth is.

Dalio has long warned investors and the general public that the United States and Europe are in a state of secular decline and that China will soon rival (if not eclipse) the United States as a global superpower. He also warned investors against betting on US equities and said he favored “real” assets, such as real estate or commodities.

And in an interview with the Financial Times published on Monday, Bridgewater’s chief investment officer Greg Jensen – who shares the role of CIO at the hedge fund giant with his co-CIO Bob Prince – revealed that Bridgewater, the huge hedge fund founded by Dalio in the 1970s, opened bets against US and European corporate debt after his successful bet against US government debt.

Bridgewater manages over $150 billion, making it the world’s largest hedge fund by assets under management.

The company has also bet against US stocks this year.

“We are in a radically different world,” Jensen told the FT.

According to Jensen, the bet against corporate bonds is based on the firm’s view that inflation will be much more tenacious than the Federal Reserve currently expects, which will eventually force the central bank to pick up the pace. of its interest rate hikes. The Fed and a number of other central banks are raising interest rates and tightening monetary policy after years of easy money policy. On Tuesday, the Reserve Bank of Australia raised its benchmark interest rate by a margin larger than most economists covering the central bank had expected. The European Central Bank also announced its intention to start raising interest rates for the first time in more than a decade.

If that happens, the Fed “could tighten very hard, which would then crack the economy and likely crack the weaker ones.” [companies] in the economy”.

While the U.S. economy is unlikely to return to the relatively robust growth rate of the past five years, Jensen asserted that nominal growth — that is, growth without taking inflation into account — is expected to “sustain ”, and the weak economy will not be “self-reinforcing”.

He added: “We think nominal growth will hold up. The real economy will be weak, but not a self-perpetuating weakness.

However, higher rates will result in higher borrowing costs for businesses and consumers, making it harder for struggling businesses to obtain financing, which could hurt bond prices.

Bridgewater is best known for this type of ‘macro’ betting – i.e. betting on bonds, currencies and stocks based on broad economic trends, as opposed to picking and choosing individual stocks to buy or bet against.

With some investors hoping the Federal Reserve might make enough headway in fighting inflation to slow, or briefly halt, its rate hikes at its policy meeting in September, Cleveland Fed Chair Loretta Mester , indicated that she would not support such a proposal. Investors will be watching closely a batch of inflation data to be released on Friday to see how prices fared in May.

When it comes to its bearish outlook, Bridgewater is not alone: ​​the Organization for Economic Co-operation and Development lowered its forecast for global growth on Wednesday, a day after the World Bank lowered its forecast for 2022.

Jensen is also not the only fund manager to doubt the Fed’s ability to fight inflation. Tim Magnusson, lead portfolio manager at hedge fund firm Garda Capital Partners, told CNET he thinks inflation could stay stubbornly north of 7% annualized at the end of 2022. Magnusson was one of the few fund managers who last year correctly anticipated that inflation was about to pick up after three decades of relatively subdued price pressures.

Bridgewater declined to disclose the size of its corporate bond bets and Jensen did not share any further details of the deal with the FT. The company did not return a request for comment from CNET.

As noted above, corporate bonds have already taken a hit since the start of the year. The SPDR High Yield Bond ETF JNK,
-0.57%,
which allows retail investors to bet on (or against) US high-yield corporate debt, has fallen more than 11% since the start of the year. The SPDR Euro High Yield Bond UCITS ETF JNKE,
-0.26%,
which tracks a basket of European high yield companies, fell more than 10% over the same period.

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