Jeffrey Gundlach says there's a low chance that, in a deep recession, Washington could try to replace higher-coupon Treasuries with new securities paying much lower coupons. He warned such a move would hit fixed-income holders and market prices hard and described the scenario as a longshot investors should hedge against. Gundlach has already repositioned parts of DoubleLine’s funds into lower-coupon Treasuries of the same maturities, foreign currencies and gold. He argued the root cause is rising US interest costs and market signals he sees as a loss of confidence in long-dated dollar assets, with concrete portfolio steps already in place to protect against the risk.

Jeffrey Gundlach, the founder of investment manager DoubleLine, has sketched a dramatic policy response he says Washington could take if the US enters a severe recession and markets lose faith in long-term dollar assets. He suggested Treasury might try to shrink its interest bill by replacing higher-coupon paper with new securities yielding about 1 percent, down from roughly 4 percent on average today. He called the possibility a longshot but argued it's actionable for investors, and his firm has moved to hedge against it.

Why Gundlach thinks the risk exists

Gundlach links the scenario to the scale of US deficits and the rising interest burden. He cited an annual federal budget deficit of roughly $2.1 trillion and said continued elevated interest rates could make the government’s interest cost untenable. That fiscal pressure, combined with what he sees as abnormal market signals, is the basis for his warning that holders might lose faith in long-dated Treasuries.

The coverage around Gundlach’s remarks points to unusual market behaviour. Some reports say the 10-year Treasury yield climbed about 74 basis points from its low in September following the Federal Reserve’s first rate cut. Other reporting frames the shift as closer to 100 basis points in long-dated yields after rate cuts, casting the move as a repricing of duration risk. The US Dollar Index was cited around 97.8 and described as roughly 9 percent lower from the start of the year during the period Gundlach discussed. Gundlach highlighted episodes where the dollar weakened while the S&P 500 fell, and where long-term yields climbed after rate cuts instead of falling, which he sees as a break with historical patterns.

One report in the packet estimates that average Treasury coupon rates have risen from under 2 percent to about 4 percent, driving an estimated $800 billion increase in annual interest costs. That particular figure, and an estimate that total US debt is nearing $37 trillion, appear in one source only.

Mastheads

Gundlach and the coverage argue that the higher-coupon stock is the vulnerability. If those higher coupons must be refinanced in a stressed environment, or if investors refuse to hold them, the Treasury’s options would be constrained.

Gundlach sketched a hypothetical policy response in which Treasury forces a swap of existing, higher-coupon bonds into new, low-coupon securities to cut interest expense. He warned that such a forced restructuring would crush bond prices and, in his words, effectively close US access to credit for a generation. He described the outcome as dependent on a severe recession and a particular policy choice by Washington rather than an imminent move, and he placed the probability well under 30 percent.

How DoubleLine has repositioned portfolios

To prepare for that tail risk, DoubleLine has been reallocating away from higher-coupon Treasuries and increasing allocations to the lowest-coupon issues of the same maturities. Gundlach said the firm has also boosted exposure to foreign currencies and gold as explicit hedges.

Those portfolio changes are already in place, he said, and are intended to protect against a coupon-rewrite scenario that would punish holders of high-coupon US paper.

The reports note DoubleLine manages a large pool of assets, and one piece specifically reports the firm manages over $100 billion while describing the shift toward foreign currencies and gold. That particular figure appears in one source only. Gundlach also pointed to opportunities outside the US, naming selected emerging markets and India as potential beneficiaries of a secular reallocation away from dollar assets if confidence in long-dated dollar paper were to weaken.

Not all coverage shares the same emphasis on the severity of the repricing. Different reporting threads disagree on the scale of the yield moves after rate cuts, with some describing a 74 basis point move in the 10-year and others putting the change nearer 100 basis points. One report also cited confidence in US assets from large banks such as JPMorgan and Morgan Stanley, a point that appears in a single account in the packet.

Gundlach framed his thesis as a scenario to hedge against, not an imminent forecast. He called the probability low, but he said the consequences would be severe enough to justify repositioning portfolios. The most concrete change so far is DoubleLine’s rotation into lowest-coupon Treasuries of comparable maturities, along with higher allocations to non-dollar holdings and gold.

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Gundlach described the outcome as a low-probability longshot and said DoubleLine has already reweighted into lowest-coupon Treasuries, foreign currencies and gold as protection against a potential coupon rewrite.

This article was created with AI assistance.