- "Bond King" Jeff Gundlach sounded the alarm on the US debt as rates stay higher-for-longer.
- Interest costs on the debt are "exploding," and the US could enter a recession in 2024, he warned.
The US's $33 trillion debt mountain is becoming more alarming, and a recession could be coming for the US economy sometime within he next year, according to "Bond King" Jeff Gundlach.
The billionaire and famed fixed income investor pointed to the potential fallout from higher-for-longer interest rates in an interview with Yahoo Finance on Wednesday.
Higher rates have pushed up borrowing costs for the US government, with annualized interest expenses on the US debt surging past $1 trillion last month, according to a Bloomberg analysis.
Here are his six best quotes, lightly edited for length and clarity:
1. US debt interest expenses
"The reason I'm worried about higher-for-longer is something that is already in evidence, but isn't getting enough attention, and that is our fiscal situation. The interest expense on the debt is exploding in a vertical fashion, because all of those bonds that were issued back at 25 to 50 basis points … they're all rolling off, and they're rolling off with great speed."
That's partly because bonds that are paying next to nothing in yields are now approaching maturity. Those will likely be reissued as yields are hovering close to 5%, Gundlach later added.
2. Small business pain
"We have a massive problem we're staring down because of the low interest rates being in place for so many years, almost a decade, and now the Fed being higher-for-longer. This is also happening to small businesses, that used to pay 4% and now they're paying 9% or even 12%, which is obviously another problem if we're higher for longer."
3. Recession is coming.
"My belief is that we're going to be in recession – if we're not already in recession – we'll probably be in recession by the second quarter of 2024."
He later added, "All of our lives have been geared to low interest rates, and now that we understand that higher interest rates have a consequence, I think that this idea that we're going to avoid a recession is really losing steam."
4. Deficits to worsen in recession
"This fiscal problem is going to get much, much worse in a recession, because of course there's going to be a strong response. There's going to be probably an inflationary response to this fiscal situation."
That could eventually push up the US deficit from 6%-8% of GDP to 9%, Gundlach predicted. A larger deficit could stoke inflation and cause interest rates to tread higher over the second half of 2024, he later added.
5. Debt math near breaking point
"In five years, let's just say we go higher-for-longer, and we have a 6% interest rate, and we have 9% of the deficit be of GDP … 50% of all tax receipts would be going to interest payments. Which of course, is an impossibility, given that 70% of the budget is mandatory spending," Gundlach said, referencing a projection from the Congressional Budget Office.
"We're really getting to that moment, that we've all been, us old timers, have been talking about for decades." Gundlach said. "We're basically at that moment where it's not our grandchildren's problem, it's not our children's problem, it's our problem," he later added.
6. Get out of the Magnificent Seven
"They will obviously be the worst performers in the upcoming recession. Whatever is leading the charge going into the economic downturn invariably must lead the charge on the way down. I would get out of them. I would go to an equal-weighted basket as opposed to a market-weighted basket. I would be moving away from [the] US banking system for sure."