DoubleLine Capital’s Jeffrey Gundlach is repositioning some of his funds for the longshot possibility that the US government could move to alter its existing debt.
In an interview with Bloomberg Television, Gundlach suggested that the US could, in response to a future recession, 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 future recession, 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.”
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.
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.’”
Treasury Secretary Scott Bessent has discussed trying to manage the yield curve as a tool to manage the US debt load, 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.
With assistance from Aaron Weinman.
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