Is the US bond market on the brink of a dangerous debt death spiral?

He’s pointed to an impending debt death spiral for the US that could contribute to a global breakdown of the major monetary, political and geopolitical orders.

So, what is a debt death spiral—and is that what we’re in for? That’s what we’ll dig into in this video.

Past performance isn’t a reliable indicator of future results.

Dalio’s first and biggest concern is the size of the national debt. This is the US debt-to-GDP ratio since 1940. This shows how much the US government has borrowed compared to the size of the entire US economy. When it’s over 100%, that means the US owes more than its economy produces in a year.

It’s currently sitting at $37 trillion, or 124% of GDP—higher than it’s ever been before. Higher even than during World War II, which is shown in this spike. That spike in debt was only fleeting. It began to fall immediately after the war, reaching a low in the late 1970s, after which debt began to climb again. It shot up rapidly after the 2008 financial crisis and again during the pandemic—both periods of heavy government spending.

This brings us to today’s debt levels

This is why Dalio sees it as likely that we’re heading for a debt crisis in the coming years if something doesn’t change.

Just look at US government spending over the past 30 years and you can see a clear trend. This is the government’s balance sheet—spending versus revenue. Since 2001, the US federal government has been running growing deficits each and every year. In 2024, that deficit was $1.8 trillion—and it’s only expected to grow.

That $1.8 trillion deficit is around 7% of US GDP. Moody’s forecasts this ratio to grow to 9% by 2034. So, it is projected to get worse. Dalio has warned that unless that deficit can be brought down to around 3% of GDP, we could see real problems.

This is where Dalio’s debt death spiral comes in

As the US runs up bigger deficits, they’re incentivised to issue more bonds to pay for them. That floods the bond market, leading to an oversupply of bonds relative to demand. That leads to higher interest rates, higher borrowing costs and all sorts of problems for the economy.

This is the core of Dalio’s warning. If there’s too much supply of bonds, we could see a debt death spiral. And this problem is happening now. In 2025, $7 trillion in Treasury debt will come due for payment—around 30% of GDP. That’s known as a maturity wall. The government will have to issue a whole bunch of new debt to pay for the debt that’s coming due. This could be a catalyst for Dalio’s debt death spiral.

This big debt mess has led to some big news recently. Moody’s downgraded the US credit rating from AAA to AA1—only the third time in history this has happened.

Money printing would devalue the dollar, which would also devalue the return investors get from bond yields. That’s because a greater money supply means each dollar is worth less. So, we could see a debt death spiral if US Treasury supply far outstrips demand.

We’ve already seen that the bond market could soon be flooded with supply. But what about demand?

A huge chunk of US debt is held by foreign investors—mainly governments and central banks. They hold about $9 trillion, or 25% of the total. This chart shows which countries hold US debt. Japan leads with $1.1 trillion, followed by China with $761 billion and the United Kingdom with $740 billion.

Here’s where things get dicey. There’s potential evidence that demand from some foreign governments is weakening—and the Trump administration’s policies could make it worse.

Why would foreign governments keep buying US bonds? First, US Treasuries remain a safe haven—especially in times of global uncertainty. If other economies falter, investors flock to US debt for stability.

Second, countries like Japan and China hold Treasuries to keep their currencies competitive. Buying dollar-denominated bonds helps prevent their own currencies from appreciating too much, which could hurt their exports.

Third, with $8.5 trillion in US debt held abroad, these countries have a vested interest in maintaining the dollar’s value and the US’s creditworthiness. A stable US economy benefits their own financial systems. These forces support continuing international demand for US Treasuries.

But why might they sell or stop buying?

This is where Dalio’s warning gains traction. The Trump administration’s aggressive trade policies—particularly tariffs—are shaking things up. They’ve already spiked average US tariff rates to over 22%, the highest since 1909. And they’re sparking trade wars. These tensions are prompting foreign governments to rethink their reliance on US debt.

China, for instance, has been quietly selling US Treasuries for years, reducing its holdings to $761 billion by early 2025. This is partly to diversify reserves into gold and other currencies, but also due to ongoing trade disputes and geopolitical tensions.

So, is there still demand for US bonds—or are we nearing a debt death spiral?

For now, demand hasn’t collapsed. Domestic investors like private funds are stepping in as foreign buying slows. The Federal Reserve could also buy Treasuries to stabilise markets—known as quantitative easing. Though this risks inflating the money supply and devaluing the dollar, another concern that Dalio flags.

If foreign governments significantly reduce purchases or start dumping bonds, the oversupply of debt could overwhelm demand. This would trigger the higher yields and borrowing costs that define a debt death spiral.

Dalio’s point is that we’re not there yet—but the risks are mounting.

Could we see one?

If foreign demand holds steady and the US reins in its deficit—say, to Dalio’s target of 3% of GDP, or $800 billion—we might avoid it. But the risk is higher than ever.

At Capital.com, we’ll keep tracking the US debt crisis, recession risks and market trends.

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