The "new Bond King" Gundlach warns: The next recession may trigger a US debt crisis, and US Treasury bonds will no longer be a safe haven.

Zhitong Finance APP has learned that DoubleLine Capital CEO, the “new Bond King” Jeffrey Gundlach, has warned that the next round of U.S. economic downturn could trigger a debt crisis, driving long-term U.S. Treasury yields significantly higher—breaking the long-standing perception that bonds are always a safe haven during times of economic turmoil.

This scenario may force the Federal Reserve and the Treasury Department to implement unconventional policies, such as the Fed restarting “Operation Twist” to purchase long-term bonds, or even engaging in debt restructuring. He stated that he is focusing on low-duration assets to protect DoubleLine Capital’s funds from the impact of further rate hikes.

“Once the economy falls into recession, the market will be highly focused on the fiscal situation,” he said at an event in New York. “The budget deficit could easily hit 12% of GDP. That would mean about $3 trillion in annual interest payments, and such a burden is simply unsustainable.”

Though DoubleLine Capital’s ideas are somewhat extreme, they reflect deepening investor concerns over the diversification benefits of fixed income. Traditionally, fixed income has been viewed as a tool to buffer portfolio losses during economic downturns.

In recent years, inflationary shocks have battered bonds, sometimes causing simultaneous sell-offs in both bonds and stocks. If the next recession is also inflationary, this would limit central bankers’ scope to stimulate the economy by cutting rates.

Gundlach cited the breakdown of several closely-watched market correlation indicators since 2020 as evidence, including the ratios of gold and copper to U.S. Treasury yields, suggesting that the market has entered a new regime of a long-term upward trend in interest rates. Meanwhile, he noted that the previous inverse relationship between the U.S. dollar and the U.S. stock market has also disappeared.

“We are in an upside-down world. In the next recession, long-term rates will rise, and the very reason they rise will be the debt crisis triggered by the recession,” he said.

It is understood that Gundlach was formerly a star bond fund manager at TCW before leaving after a falling out and founding DoubleLine Capital in 2009. As of March, DoubleLine Capital managed $95 billion in assets and had more than 250 employees.

Gundlach said that compared with a year ago, he is “slightly less bearish” on long-end bonds, but he is still betting that yields will eventually move higher. He believes that if the bond selloff persists, the U.S. could introduce even stronger policy interventions to contain it.

One possibility is restarting “Operation Twist”, where the Fed suppresses long-term rates while keeping short-term rates high. “I think they’ll step in at around 6.5%,” he said, in reference to the yield level that could trigger action.

Another option is restructuring U.S. Treasury debt—a risk he has warned about many times before. This would involve cutting the coupon payments on all outstanding bonds.

“You could simply mandate that all Treasury coupons above 1% are now set uniform at 1%. That would instantly reduce interest payments by 75% overnight,” Gundlach said. “Of course, every investor will be furious and will never trust you again. You’ll never be able to borrow money again.”