① Jeffrey Gundlach, CEO of DoubleLine Capital and widely known in the industry as the "New Bond King," warned on Thursday that the next U.S. recession could trigger a debt crisis and cause long-term U.S. Treasury yields to surge; ② This would overturn the decades-old conventional wisdom that U.S. Treasuries always serve as a safe haven during periods of economic turmoil.
Cailian Press, September 17 (Editor: Xiao Xiang): Jeffrey Gundlach, CEO of DoubleLine Capital and widely known in the industry as the "New Bond King," warned on Thursday that the next U.S. recession could trigger a debt crisis and cause long-term U.S. Treasury yields to surge—overturning the decades-old conventional wisdom that U.S. Treasuries always serve as a safe haven during periods of economic turmoil.
Gundlach believes this scenario could force the Federal Reserve and the U.S. Treasury Department to adopt unconventional policies, such as restarting the central bank's "Operation Twist" (OT) to purchase long-term bonds, or even engaging in debt restructuring.
Gundlach candidly stated that he is currently focusing on allocating assets with short duration to protect DoubleLine Capital's funds from the impact of further interest rate hikes.
Will the next recession bring catastrophic consequences?
Speaking at an event in New York, Gundlach said, "If a recession occurs, fiscal conditions will come under intense scrutiny, and the U.S. budget deficit could easily reach 12% of GDP. This could result in annual interest expenses of $3 trillion, which is simply unsustainable."
Although Gundlach's views are extreme, they reflect growing investor concern about the diminishing risk-diversification benefits of fixed-income assets—traditionally viewed as instruments capable of buffering losses in equity portfolios during recessions.
In recent years, the inflationary nature accompanying various shocks has dealt a heavy blow to bonds, sometimes even leading to simultaneous sell-offs in both bonds and equities. If the next recession is also accompanied by inflation, it will limit the room for central banks to stimulate the economy through interest rate cuts.
Gundlach cited the breakdown in market correlations that has drawn significant attention since 2020—including comparisons between the gold-to-copper ratio and U.S. Treasury yields—as evidence of a "new paradigm" marking a secular shift toward higher interest rates.
He noted that, meanwhile, the U.S. dollar and U.S. equities no longer maintain their previous negative correlation.
“We are living in a world where conventional wisdom is turned on its head—in the next economic recession, long-term interest rates will rise, driven precisely by the debt crisis spawned by the recession itself,” he stated.
Is a restructuring of U.S. Treasury debt really unthinkable?
Gundlach was formerly a star bond manager at TCW for many years but left the firm in 2009 following a dispute, subsequently founding DoubleLine Capital. As of March, DoubleLine Capital managed $95 billion in assets and employed more than 250 people.
Gundlach stated that he is now “slightly less pessimistic” about long-term interest rates compared to a year ago, but still expects yields to eventually rise. He believes that if the bond sell-off continues, U.S. authorities may implement more aggressive policy interventions to curb the decline.
One possibility is to restart “Operation Twist,” a policy measure in which the Federal Reserve sells short-term bonds and buys long-term bonds to lower long-term interest rates and alleviate future liquidity tightness. “I believe they will take action when yields reach around 6.5%,” he said, referring to the yield level that could trigger intervention.
Another option is to restructure Treasury debt—a risk Gundlach has previously warned about. This would involve reducing coupon interest payments on all outstanding bonds.
Gundlach remarked that the U.S. Treasury could simply default on its obligations: forcibly cap the coupon rate on all Treasury bonds with rates above 1% at 1%. This would slash interest expenses by 75% overnight. However, the consequence would be that all creditors would be thoroughly enraged, refuse to do business with the U.S. ever again, and the country would find itself unable to borrow money.