Jeffrey Gundlach, chief executive of DoubleLine Capital, has cautioned that the next US economic downturn might spark a debt crisis, driving long-term Treasury yields sharply higher — a scenario that flips decades of conventional wisdom that bonds act as a safe haven during economic turmoil. Such a development could push the Federal Reserve and Treasury toward unconventional responses, including a repeat of Operation Twist, central bank purchases of long-dated debt, or even a restructuring of government obligations. He noted that he is currently focusing on low-duration assets to shield DoubleLine's funds from further increases in interest rates.

"If a recession hits, the fiscal situation will come under intense scrutiny," Gundlach said at an event in New York. "The budget deficit could easily reach 12% of GDP. That would translate into $3 trillion in annual interest costs, which is completely untenable." His outlook, while on the extreme end, reflects growing investor unease about the assumption that fixed-income products can reliably diversify risk; traditionally, these instruments have been viewed as an effective buffer against equity portfolio losses during downturns.

In recent years, inflationary effects from short-term shocks have battered bond markets, sometimes leading to simultaneous sell-offs in both bonds and equities. If the next recession carries similar inflationary undertones, the central bank's capacity to stimulate the economy through rate cuts would be constrained. Gundlach pointed out that since 2020, the breakdown of closely watched market correlation indicators — including the ratios of gold and copper to Treasury yields — signals a shift in the market landscape, with long-term rates likely headed higher. Meanwhile, he observed that the inverse relationship between the dollar and US equities has also weakened.

"We're moving backward — the next recession will push long-term rates up, and the reason rates climb is that the downturn will ignite a debt crisis," he said. He added that while his pessimism on the long end of the bond curve has softened compared to a year ago, he still anticipates yields will ultimately rise. Gundlach believes that if the bond sell-off persists, the US may roll out more policy interventions to curb the decline. One possibility is replaying Operation Twist, where the Fed would push long-term rates down while keeping short-term rates elevated. "I think they'd act at around 6.5%," he said.

Another option would be restructuring Treasuries, which would involve cutting coupon payments on outstanding debt — a scenario he has flagged before. "You could simply declare that all Treasuries with coupons above 1% are now 1%. That would slash your interest expenses by 75% overnight," Gundlach explained. "Of course, every investor would be furious and would never lend to you again. You'd lose access to borrowing altogether."