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.
“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.
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.