Jeffrey Gundlach, CEO of DoubleLine Capital and widely known as the "New Bond King," has issued a stark warning that the next US economic downturn could spark a debt crisis, driving long-term Treasury yields sharply higher. This scenario would upend the decades-old belief that bonds always serve as a safe haven during periods of economic turbulence.
Such a crisis could force the Federal Reserve and the Treasury to adopt unconventional measures, potentially including the Fed restarting "Operation Twist" to purchase long-term bonds, or even resorting to debt restructuring. Gundlach noted that he is currently focusing on low-duration assets to shield DoubleLine's funds from further interest rate increases.
"Once the economy slips into recession, the market will zero in on the fiscal situation," he said at a New York event. "The budget deficit could easily hit 12% of GDP. That would generate roughly $3 trillion in annual interest expenses, an unsustainable burden."
While DoubleLine's perspective leans toward the extreme, it reflects growing investor unease about the diversification benefits of fixed income. Traditionally, fixed income has been viewed as a tool to cushion portfolio losses from equities during economic downturns. In recent years, however, inflation-driven shocks have battered bonds, sometimes causing simultaneous sell-offs in both bonds and stocks. If the next recession is similarly inflationary, it would constrain central bankers' ability to stimulate the economy through rate cuts.
Gundlach pointed to the breakdown of several closely watched market correlations since 2020, including the ratios of gold and copper to Treasury yields, as evidence that the market has entered a new regime of structurally higher long-term interest rates. He also noted that the previous inverse relationship between the US dollar and the stock market has vanished.
"We are in an upside-down world where, in the next recession, long-term rates will rise, and the reason they rise is precisely the debt crisis triggered by that recession," he explained.
Gundlach, a former star bond manager at TCW who left under acrimonious circumstances to found DoubleLine in 2009, now oversees $95 billion in assets with over 250 employees as of March. He said he is "slightly less pessimistic" on long-end bonds than he was a year ago but still bets that yields will eventually climb higher.
He believes that if the bond sell-off persists, stronger policy intervention could emerge to curb it. One possibility is reviving Operation Twist, where the Fed pushes down long-term rates while keeping short-term rates elevated. "I think they would step in around the 6.5% level," he said, referring to the yield threshold that might trigger action.
Another option is Treasury debt restructuring, a risk he has repeatedly flagged before. This would involve cutting coupon payments across all outstanding bonds. "You could simply mandate that any Treasury with a coupon above 1% now has its coupon reduced to 1%. That would slash interest costs by 75% overnight," Gundlach stated. "Of course, every investor would be furious and never trust you again. You'd never be able to borrow money again."
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