“T-bill and chill” is the best strategy to investors can take amid the higher-for-longer interest-rate environment, according to the so-called Bond King, Jeffrey Gundlach.
In an interview with CNBC’s Closing Bell program on Wednesday, Gundlach—who has a net worth of $2.2 billion—according to Forbes, said that higher-for-longer interest rates could trigger a major economic crisis in the United States.
On Wednesday, the Federal Reserve held interest rates steady at a 22-year high of 5.25% to 5.5%. In September, the central bank warned that rates would need to be stay higher for longer than previously expected in order to tame inflation.
Gundlach told CNBC that the current federal deficit—which hit almost $1.7 trillion in fiscal 2023—was “completely unsustainable” in the current interest rate environment.
“Higher-for-longer means we have a massive interest expense problem in this country that is going to be, I believe, the next financial crisis,” he warned.
With U.S. fiscal spending reaching unprecedented levels, the U.S. Treasury is expected to borrow more than $1 trillion via short-dated T-bills by the end of 2023 as the government looks to build its cash reserves.
According to the Cato Institute think tank, federal interest payments doubled between 2015 and 2023, with the government set to pay $640 billion in net interest this year. By some estimates, interest payments will become the government’s single biggest expense by 2051.
Gundlach isn’t the only big name on Wall Street to warn about the potential economic fallout of vast fiscal spending. JPMorgan boss Jamie Dimon and billionaire investors Stanley Druckenmiller and Ray Dalio have all sounded the alarm in recent months over the deficit.
Predicting the 2007 housing crisis
Gundlach cofounded DoubleLine Capital—which today manages more than $140 billion in assets—in 2009, and was soon outperforming rival bond fund managers. His success earned him the nickname King of Bonds or the Bond King.
The billionaire bond trader also correctly predicted the 2007 housing crash.
Asked on Wednesday about his investment strategy as the Fed kept interest rates high, Gundlach said he wasn’t a fan of keeping a large cash holding despite cash having high returns right now.
“I think rates are going to fall as we move into a recession in the first part of next year,” he predicted. “I don’t like cash because I think your interest rate, which is very attractive presently, may decline quite substantially next year.”
Instead, he advised investors to look to short-term bonds for strong returns.
“I would rather be in something that’s about two to three years. So at least you’re getting that yield, around 8%, for more than six months,” he said. “T-bill and chill—you can buy the six-month T-bill and get 5.5%. The rate is no longer going higher, it’s now starting to potentially decline, so I don’t think you want to be in cash.”
Gundlach said that although the yield curve was suggesting the Fed would cut rates by about 50 basis points next year, this was the “one thing I think will not happen.”
“I think either rates will stay high for longer, which is not my base case but I acknowledge that’s a possibility, but if the economy rolls over as I expect, the Fed is not going to cut rates 50 basis points, they’re going to cut rates 200 basis points,” he explained. “That’s what’s wrong with the cash strategy.”
