New Bond King: Preparing for U.S. "debt restructuring"; Hassett: U.S. debt default "impossible in a million years"

"New Bond King" Jeffrey Gundlach is quietly adjusting his portfolio to prepare for a scenario with very low probability but severe consequences—unilateral debt restructuring by the U.S. government. The White House responded with strong denial.

According to Bloomberg, Gundlach said, if the U.S. falls into a severe recession in the future, the government may be forced to restructure its debt to reduce interest expenses. For this reason, he has swapped high-coupon Treasury bonds in his flagship fund for the lowest-coupon bonds of the same maturity—if the government forces a cut in coupon rates, the losses on low-coupon bonds will be much smaller than on high-coupon bonds.

He gave an example: the government might unilaterally lower the coupon rate from 4% to 1% without changing the maturity, referring to it as “the ultimate delaying tactic.”

In response, White House National Economic Council Director Kevin Hassett said: "This administration would never do anything that even resembles a debt default." He emphasized that such a possibility is less than one in a million.

Gundlach: Risk of U.S. Government Default Cannot Be Ignored

Gundlach's logic is clear yet radical: if the U.S. falls into a severe recession, interest expenses may soar to $3 trillion, 30-year Treasury yields could hit 6%, and the government would face an “unable to pay” predicament. The outcome he fears: the government choosing to unilaterally lower the coupon rate from 4% to 1%, which he calls the “ultimate delaying tactic.”

To hedge this extreme risk, Gundlach has swapped high-coupon Treasury bonds for the lowest-coupon bonds of the same maturity in parts of his portfolio. He believes if the government lowers coupon rates across outstanding debt, low-coupon bonds would see less reduction and smaller price losses; high-coupon bonds, having more room to cut, would suffer deeper price shocks.

Gundlach admits this scenario is extremely unlikely. "I'm not saying there's a 30% chance, it's not even close to that," he stated. But this tail risk is enough for him to defensively adjust his portfolio.

Hassett: No Possibility of Debt Default for a Million Years

White House National Economic Council Director Kevin Hassett stated,the practice of unilaterally lowering coupon rates on outstanding U.S. Treasuries essentially amounts to debt default, and "this administration would never do anything resembling debt default even in a million years."

Hassett emphasized that the Trump administration is committed to fiscal responsibility, citing the reduction in federal workforce as an example. He also pointed out that the current U.S. economic growth is accelerating, mirroring the expansion of the 1990s, which will help lower the government's debt burden, just like it did then.

When pressed for details about reducing coupon rates, Hassett responded, "We will never do anything but be a responsible fiscal government." He also reiterated the administration's commitment to a strong dollar and a robust, responsible fiscal government.

Concerns Under $31 Trillion Debt

According to current market pricing, U.S. Treasury default is still regarded as an extreme tail event. Bloomberg’s compiled credit default swap data shows the implied five-year U.S. default probability is below 1%. Although benchmark Treasury yields have risen above 4% from pandemic lows, they remain far below the double-digit levels of the early 1980s.

However, the continued expansion of U.S. debt has triggered broad market concerns. Publicly held federal debt is nearing $31 trillion, exceeding the U.S.'s annual economic output. Meanwhile, economists and bond traders expect annual U.S. budget deficits to remain around $2 trillion in coming years, further increasing Treasury funding needs. It is estimated that the flagship tax cut bill launched by Trump last year will add up deficits over the next decade.

Gundlach warned that if such restructuring really happens, bond prices would collapse and the U.S. government would be "unable to re-enter the borrowing market for generations"—he sees this as a radical but thorough “path to ending dependence on debt.” Managing the ever-growing debt burden remains one of the core topics fiercely debated by investors.

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