"What if they really go crazy?" Gundlach warns the US to restructure its national debt, has adjusted its positions in response to the "ultimate can-kicking."

DoubleLine Capital's Jeffrey Gundlach is adjusting positions in some of his funds to prepare for an extreme scenario in which the US government may choose to restructure its debt in response to a potential economic recession. In an interview, Gundlach suggested that although unlikely, the US could someday opt to swap high-interest treasury bonds held by bondholders for bonds of the same term but with lower interest payments. To prepare for this potential move, Gundlach has already replaced high-interest treasury bonds with low-interest ones of the same term in some investment portfolios, including his flagship fund. His concern is that the US government, in an effort to reduce interest expenses during a severe economic slowdown, may unilaterally decide to lower interest rates on all outstanding debts. He gave an example of the government potentially lowering rates from 4% to 1% without changing the term of the bonds - what he calls the "ultimate game of kick the can." As the world's largest government bond market, a debt restructuring by the US would be a significant financial event that could impact the global economy. While technical default discussions occasionally arise in the context of US government shutdowns, Gundlach's scenario is considered the most extreme in the spectrum of restructuring. "I think what they might do, if they could get away with it, is a restructuring for existing bondholders," he said. He added that if the government were to do so, bond prices would plummet, and the government would "be unable to borrow for generations - its a solution to our 'debt addiction.'" With US public debt totaling nearly $31 trillion, exceeding the country's annual economic output, the likelihood of default is extremely low. According to credit default swap pricing in the market, the implied probability of such an event in a five-year period is less than 1%. Additionally, although benchmark government bond yields have risen to over 4% from their pandemic lows, they still remain far below the double-digit levels of the early 1980s. DoubleLine Capital, managed by Gundlach, oversees nearly $100 billion in fixed income and other assets. He has been warning for some time that a reckoning for US debt is coming. He acknowledges that this scenario would be extremely difficult for the US government to achieve. "Im not even saying theres a 30% chance of this happening," he said. "But what if they said one day, 'You know what? Our interest expense now is $3 trillion. Weve had a recession. Rates have gone up. Were now issuing 30-year bonds at 6%. We cant afford this. Were drowning.'" Nevertheless, how the US will manage its ever-expanding debt burden remains a fiercely debated issue for investors. One of last year's hot topics on Wall Street was the debate over the "Mar-a-Lago Accord," in which it was questioned whether President Trump might compel some foreign bondholders to exchange their treasury holdings for ultra-long-term bonds to alleviate US debt burdens. Last month, former Treasury Secretary Henry Paulson suggested authorities devise contingency plans to prevent a potential collapse in demand for US treasuries due to market concerns about federal debt. Treasury Secretary Scott Bessent has discussed attempting to manage the yield curve as a tool to address the accumulation of US debt. Gundlach believes that the scenario he has outlined is a version of this strategy. "What if they really go crazy?" he said during a wide-ranging interview at DoubleLine Capital's Los Angeles office, during which he also discussed private credit and gold prices.