DoubleLine Capital’s Jeffrey Gundlach is repositioning some of his funds for the extreme scenario that the US government could choose to restructure its debt in response to a potential future recession.
In an interview with Bloomberg Television, Gundlach suggested that, while unlikely, the US may at some point opt to swap out bondholders’ higher-coupon Treasuries and replace them with ones with lower interest payments across the maturity curve.
To get ahead of such a move, Gundlach has replaced higher-coupon Treasuries in some portfolios — including its flagship — with the lowest-coupon ones of the same maturity.
His worry is the US government, in a bid to reduce its interest payments during a severe slowdown, might decide to lower the coupons unilaterally on all outstanding debt. He gave the example of it potentially reducing coupons to 1% from 4%, without changing the maturity of the debt, something he called “the ultimate way of kicking the can down the road.”
As the world’s largest government bond market, a US debt restructuring would be a seismic financial event with ripple effects across the global economy. While technical debt defaults have been debated at times in relation to US government shutdowns, what Gundlach has in mind is at the extreme end of restructuring.
“I think what they’ll do instead is a restructuring of the existing debt holders, if possible,” he said. Should the government do such a thing, bond prices would collapse and the government “would not be allowed to borrow for generations, which is a solution to our debt addiction,” he added.
National Economic Council Director Kevin Hassett said on Bloomberg TV that the Trump administration believes in “strong, fiscal-responsible government.”
In response to Gundlach’s comments, he added: “There’s not a chance in a million years that this administration would ever do anything that looks in any way like a debt default.”
The US debt held by the public has swelled to nearly $31 trillion, surpassing the size of the economy’s annual output, though a default is a remote possibility.
The five-year implied probability of such an event is below 1%, according to credit default swaps pricing compiled by Bloomberg. And while benchmark Treasury yields have climbed to over 4% from the lows of the pandemic, they remain well below the double-digit figures they reached in the early 1980s.
Gundlach, whose DoubleLine manages almost $100 billion in fixed income and other assets, has been warning of a reckoning for US debt for some time. He admitted that the plan would be a longshot for the US government to pull off.
“I’m not saying this is a 30% chance, even,” he said, “but what if they say, ‘You know what? Our interest expense is now $3 trillion. We had a recession. Rates have gone up. We’re now issuing 30-year bonds at 6%. We can’t afford it. We’re drowning here.’”
Still, how the US will manage its growing debt load is a much-debated issue for investors.
Last year a hot topic on Wall Street was the ‘Mar-a-Lago Accord’ debate over the possibility President Donald Trump could force some of the US’s foreign creditors to swap their Treasuries into ultra long-term bonds to ease the country’s debt burden. And last month, former Treasury Secretary Henry Paulson suggested authorities prepare a back-up plan to avert any potential collapse in demand for Treasuries coming from concerns around federal debt.
Treasury Secretary Scott Bessent has discussed trying to manage the yield curve as a tool to deal with the US debt pile and Gundlach said he sees the scenario he laid out as a version of that strategy.
“What if they go crazy,” he said in the wide-ranging interview from his firm’s Los Angeles offices, where he also mused about private credit and the price of gold.
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