Jeffrey Gundlach, chief executive of DoubleLine Capital, laid out his case at an event in New York. "If there's a recession, there's going to be incredible attention paid to the fiscal situation," he said, arguing that a downturn could flip the usual playbook for bonds. In his words, "We're in backward land and in the next recession long-term rates are going to go up and they'll go up because of the debt crisis that it's going to usher in."
He added that he is "a little less negative on the long end" than a year ago but still positions for yields to climb over time.
Gundlach expects a slump would throw the U.S. budget into sharper relief. "You would have the budget deficit go easily to 12% of GDP. That would create $3 trillion of interest expense probably per year, and you just can't do it," he said. He framed that interest tab as untenable.
Recent, inflation-driven shocks have already hit bonds hard, sometimes in lockstep with equities. If the next recession comes with the same inflationary tilt, central banks would have less room to cut rates to soften the blow. He pointed to broken market linkages since 2020 - including the relationship between gold and copper versus Treasury yields, and the dollar's traditional inverse pull on U.S. stocks - as evidence the broader rate regime has shifted.
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If long yields keep climbing, Gundlach thinks Washington could reach for less conventional tools. One option he sketched is a reprise of Operation Twist, where the Federal Reserve would lean on purchases of longer-dated bonds while keeping short-end rates high. "I think they would do that somewhere around 6.5%," he said, describing the level that might spur action.
He also floated the possibility of a restructuring of Treasury debt that cuts coupons across outstanding securities. His blunt illustration: "You could just say every Treasury bond that has a coupon above one, your coupon is now one. That would reduce your interest expense overnight by 75%," though he warned, "Of course, every investor would erupt in anger and they'd never look to you again. You'd never be able to borrow money again."
Gundlach says the diversification promise of fixed income is not a given in an inflationary downturn. To navigate that risk, he is emphasizing low-duration exposure to help shield DoubleLine's funds from further rate spikes. He founded DoubleLine in 2009 after leaving TCW, where he emerged as a star bond manager. As of March, DoubleLine managed $95 billion with more than 250 employees.
Bottom line for your money: if the next recession looks more like an inflation shock than a demand slump, bonds might not be the same safety net they were in past cycles, and policy interventions could become part of the story.
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