Gundlach: A Debt Ceiling Impasse Could Drive Rates Lower

Failing to raise the debt ceiling would be a “huge financial calamity,” according to Federal Reserve Chairman Ben Bernanke and the general consensus view. But that opinion is “exactly wrong,” at least as far as the Treasury market is concerned, DoubleLine’s Jeffrey Gundlach said in a conference call with investors last Tuesday.

Rates might actually go down, just as they did after the end of QE2, according to Gundlach.

Gundlach is the founder and chief investment officer of DoubleLine Capital, a California-based fixed-income asset manager.

“If there is no debt ceiling passed, it will force the government to essentially implement a de facto austerity program,” Gundlach said. Payments to many government departments would stop, including those to some defense contractors. Coupon payments on the Treasury’s debt, however, would continue, he said.

While Treasury investors might receive a short-term reward if no resolution is reached on the debt ceiling, Gundlach was far less sanguine about the longer-term outlook.

“We are getting close to the end of the road” and must forestall a larger crisis caused by the government’s growing debt burden, he said.

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Gundlach advised investors to construct their portfolios to defend against all three of those outcomes. Portfolios should contain inflation hedges, an income stream and protection against potential defaults.