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Ray Dalio, the billionaire founder of hedge fund firm Bridgewater Associates, has warned that the UK could be heading for a “debt death spiral”, where it will need to borrow more money to service rising interest costs.

Dalio told the Financial Times that the recent sell-off in the gilt market, coupled with bursts of good weakness, suggests the market is struggling to absorb the UK’s higher borrowing needs since the October Budget.

The combination of the increase in annual interest payments, already above £100bn a year, and the need to roll over the debt at higher borrowing costs, creates the risk of a self-reinforcing cycle, he said.

It “looks like a debt death spiral in the making because it requires more borrowing to service the debt that needs to be serviced, squeezes other spending, or requires more taxes”, said Dalio in a interview.

The market turmoil “reflects a supply-demand problem” for gilts, he said. “Why else would long-term (yields) go up when there’s a pause (in monetary policy), the exchange rate depreciates, and the economy is weak?”

He also said that the US is “showing signs” that the market may begin to struggle to absorb borrowing needs, and called the management of the country’s debt burden the “first big issue” for the second President Trump’s term in office.

A global bond sell-off in recent months has sent borrowing costs racing higher in major economies such as the UK and US, even as central banks continue to cut interest rates. interest.

The UK’s 10-year borrowing cost rose from 3.75 percent in mid-September to a 16-year high earlier this month of 4.93 percent, amid a global bond selloff and concerns over the UK economy. Yields have since recovered some ground to 4.66 percent on Monday.

The 10-year US yield reached 4.62 percent, up one percentage point over the same timeframe. Yields move back to prices.

A major driver is stickier-than-expected inflation, which has led markets to price in a shallower rate cut, but some major investors have also expressed concerns about higher levels. to borrow from countries that already carry huge debt burdens.

“When you get to the point where you have to borrow money to service the debt and interest rates go up, so the debt service charge goes up, so you have to borrow more money to pay it off, you have what those market a death spiral,” said Dalio, who this month published the first part of his new analysis of sovereign debt crises, How Nations Fall Apart.

“As risks increase, everyone sees the need to borrow more money at higher interest rates, creating (a) self-reinforcing cycle of debt deterioration.”

The sell-off in sterling and gilts evoked memories of the market crisis following former Prime Minister Liz Truss’ ill-fated 2022 “mini” Budget. At the time, Dalio wrote that the market’s decline “suggests incompetence”.

Investors have largely dismissed the comparisons, in part because sales are not as large or as sharp, but the government was forced to defend its economic plans this month as borrowing costs hit a post-financial crisis high, while chancellor Rachel Reeves is dealing with called for resignation.

A Treasury spokesman said the government’s “commitment to fiscal rules and sound public finances is non-negotiable”, adding: “The chancellor has already indicated that tough spending decisions will be made, with spending review to eliminate waste is ongoing.”

Dalio called for US and UK government deficits to be reduced to 3 percent of GDP. The US deficit is expected to remain above 6 percent of GDP this year, while the UK is set to hit 4.5 percent this fiscal year.

Some analysts have warned that radical spending cuts or new taxes could hurt countries’ economic growth and hit their finances.

Dalio accepted that “cutting the budget deficit is depressing for growth and inflation, (but) it leads to lower interest rates and those lower interest rates have a great stimulatory effect while reducing the budget deficit”.

Dalio, who resigned as Bridgewater’s chair in 2021 but remains on the board, has warned before of the risk of rising US debt to Treasuries investors. He did not put a timeframe on when what he called the “debt bomb” would explode for indebted countries.

“It’s like someone who has a lot of plaque in their arteries that builds up rapidly,” he said. Paying off debt is “strengthening and squeezing other expenses and making the risk of a piece of plaque breaking. You don’t know when that will happen but you can say that the risks are very high and rise.”