Jeffrey Gundlach Makes High-Stakes Bet on Potential US Debt Restructuring with Attractive Coupon Rates

DoubleLine Capital's Gundlach Preps for Unlikely US Debt Maneuver

In a recent interview with Bloomberg Television, Jeffrey Gundlach, the head of DoubleLine Capital, revealed that he is repositioning some of his funds in anticipation of a longshot possibility: the US government altering its existing debt structure. Gundlach suggested that the US could swap out higher-coupon Treasuries with ones offering lower interest payments across the maturity curve in response to a future recession.

According to Gundlach, this move would involve replacing higher-coupon Treasuries in some portfolios, including its flagship fund, with the lowest-coupon ones of the same maturity. His primary concern is the US government reducing its interest payments during a future recession by lowering the coupons on all outstanding debt unilaterally. Gundlach cited the example of potentially reducing coupons to 1% from 4% without changing the maturity of the debt, which he referred to as "the ultimate way of kicking the can down the road."

In the event the government were to implement such a plan, bond prices would likely collapse, and the government would be unable to borrow for generations, which Gundlach considers a solution to the country's debt addiction. He acknowledged that this scenario is a longshot, even estimating the probability as less than 30%. Gundlach posited a hypothetical scenario in which the US government, facing a recession and rising interest rates, decides to manage its debt load by manipulating the yield curve.

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In this scenario, Gundlach envisions the US government reducing its interest expense by manipulating the yield curve. This idea is not entirely far-fetched, as Treasury Secretary Scott Bessent has discussed using the yield curve as a tool to manage the US debt load. Gundlach sees his proposed scenario as a version of this strategy.