"New Bond King" Jeffrey Gundlach is quietly adjusting his investment portfolio to prepare for a low-probability but high-impact scenario: a unilateral U.S. government debt restructuring. The White House has strongly denied this possibility.
According to reports, Gundlach stated that if the U.S. falls into a severe recession, the government might be forced to restructure its debt to reduce interest expenses. In preparation, he has swapped high-coupon Treasury bonds for the lowest-coupon bonds of the same maturity in his flagship fund. Should the government forcibly reduce coupon rates, the losses on low-coupon bonds would be far smaller than those on high-coupon bonds.
He gave an example: the government could unilaterally cut the coupon rate from 4% to 1% without changing the maturity date, calling it the "ultimate can-kicking exercise."
In response, White House National Economic Council Director Kevin Hassett stated, "This administration would never do anything that even looks like a default. The odds of that are a million to one."
Gundlach: Risk of U.S. Government Default Cannot Be Ignored
Gundlach's logic is clear and aggressive: if the U.S. enters a severe recession, interest expenses could soar to $3 trillion, with the 30-year Treasury yield hitting 6%, leaving the government in a "can't pay" predicament. He fears the government might choose to unilaterally cut coupon rates from 4% to 1%, which he calls the "ultimate can-kicking exercise."
To hedge against this extreme risk, Gundlach has swapped high-coupon Treasury bonds for the lowest-coupon bonds of the same maturity in parts of his portfolio. He believes that if the government uniformly reduces coupon rates on existing debt, low-coupon bonds would see smaller cuts and more limited price losses, while high-coupon bonds would suffer deeper price impacts due to their greater compression potential.
Gundlach admitted that the probability of this scenario is extremely low. "I'm not saying it's a 30% chance, not even close to that," he said. However, this tail risk is significant enough for him to make defensive adjustments at the portfolio level.
Hassett: No Chance of Debt Default in a Million Years
White House National Economic Council Director Kevin Hassett stated that unilaterally reducing coupon rates on existing Treasury bonds would essentially equate to a debt default, and "this administration would never do anything that even looks like a default in a million years."
Hassett emphasized that the Trump administration is committed to fiscal responsibility, citing the reduction in the federal workforce as evidence. He also noted that current U.S. economic growth is accelerating, resembling the expansion momentum of the 1990s, which would help reduce the government's debt burden, as it did back then.
When pressed further about the specific idea of reducing coupon rates, Hassett responded, "We are not going to do anything other than be a fiscally responsible government." He reiterated the administration's belief in a strong dollar and a robust, responsible fiscal government.
Concerns Under the $31 Trillion Debt Burden
From a market pricing perspective, a U.S. Treasury default is still considered an extreme tail event. Data from credit default swaps compiled by Bloomberg shows the five-year implied default probability for the U.S. is below 1%. Although benchmark Treasury yields have risen from pandemic lows to over 4%, they remain far below the double-digit levels of the early 1980s.
However, the continuous expansion of U.S. debt has raised widespread market concerns. Publicly held federal debt is approaching $31 trillion, exceeding the country's annual economic output. Meanwhile, economists and bond traders expect the U.S. annual budget deficit to remain around $2 trillion for the next several years, further increasing the Treasury's financing needs. It is estimated that Trump's signature tax bill from last year will cumulatively expand the deficit over the next decade.
Gundlach warned that if such a restructuring were to occur, bond prices would collapse, and the U.S. government would be unable to return to the borrowing market for "generations"—a path he views as extreme but a complete "debt-free" approach. How to manage the accumulating debt burden remains one of the core issues debated among investors.
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