"New Bond King" Gundlach warns: The next recession could trigger a U.S. debt crisis, and U.S. Treasuries will no longer be a safe haven.

DoubleLine Capital CEO and "New Bond King" Jeffrey Gundlach warns that the next U.S. economic downturn could trigger a debt crisis, driving long-end Treasury yields sharply highershattering the decades-old belief that "bonds are always a safe haven during times of economic turmoil." This scenario could force the Federal Reserve and the Treasury Department to adopt unconventional policies, such as the Fed restarting "Operation Twist" to buy long-term bonds, or even pursuing debt restructuring. He said he is focusing on low-duration assets to protect DoubleLine's funds from further upside in interest rates. "Once the economy falls into recession, the market will focus heavily on the fiscal situation," he said at an event in New York. "The budget deficit could easily reach 12% of GDP. That would generate about $3 trillion in annual interest expenses, a burden that is simply unsustainable." While DoubleLine's view is on the extreme end, it reflects growing investor concerns about the diversification benefits of fixed income. Traditionally, fixed income has been viewed as a tool to buffer losses in equity portfolios during economic downturns. In recent years, inflationary shocks have dealt a heavy blow to bonds, sometimes causing bonds and stocks to be sold off simultaneously. If the next recession is also inflationary in nature, it would limit central bankers' room to stimulate the economy through rate cuts. Gundlach cited the breakdown of several closely watched market correlation indicators since 2020 as evidenceincluding the ratios of gold and copper to U.S. Treasury yieldsarguing that this shows the market has entered a new regime of a long-term upward trend in interest rates. At the same time, he said the dollar and U.S. stocks no longer maintain their previous inverse relationship. "We are in an upside-down world where, in the next recession, long-term interest rates will rise, and the reason they rise is precisely the debt crisis triggered by the recession," he said. It is understood that Gundlach was once a star bond fund manager at TCW. After falling out with the company and leaving, he founded DoubleLine Capital in 2009. As of March, DoubleLine had $95 billion in assets under management and more than 250 employees. Gundlach said that compared with a year ago, he is now "slightly less bearish" on long-end bonds, but still bets that yields will ultimately move higher. He believes that if the bond selloff continues, the U.S. could introduce stronger policy intervention to contain it. One possibility is restarting "Operation Twist," in which the Fed pushes down long-end rates while keeping short-end rates elevated. "I think they will step in at around 6.5%," he said, referring to the yield level that could trigger action. Another option is restructuring U.S. Treasury debta risk he has warned about multiple times before. This would involve cutting coupon payments on all outstanding bonds. "You could simply decree that all Treasuries with coupons above 1% will now have their coupons uniformly cut to 1%. That would reduce interest expenses by 75% overnight," Gundlach said. "Of course, every investor would be furious and would never trust you again. And you would never be able to borrow money again."