Jeffrey Gundlach: Private Credit Is An Unmitigated Disaster, And It’s Only Going To Get Worse
Summary
- We are in a fundamental regime shift where the next recession will bring rising long-term Treasury yields and a falling dollar, breaking the pattern of the last 40 years.
- The US fiscal path is untenable, with $2 trillion annual deficits leading interest expense toward $2 trillion, which will likely force a market-imposed resolution via either debt debasement (high inflation) or a soft default (coupon restructuring).
- The private credit market (~$2-3 trillion) is the defining financial stress of this cycle, drawing direct parallels to subprime in 2006; it is opaque, illiquid, and marks are not reliable, with widespread ownership and no incremental buyers.
- Recommends a defensive asset allocation: 40% in non-US stocks (specifically emerging markets in local currencies), 25% in high-quality sub-10-year fixed income, 15% in commodities (10% broad index, 5% gold), and the balance in cash.
- Believes the Fed follows the 2-year Treasury yield; with the 2-year above the Fed funds rate, the next move is likely a hike, not a cut, especially if oil prices remain elevated.
- Warns that high yield credit spreads (~425 bps) are not yet attractive; needs to widen to ~700 bps to consider taking risk, noting the CCC loan market is already distressed with spreads near 2000 bps.
- Advises avoiding all general obligation municipal bonds in California, Illinois, and New York due to absurd spending, tax policies, and accelerating revenue erosion, preferring revenue-backed projects instead.
- Gold is "real money" with strong structural demand from central banks potentially increasing reserves from ~30% to 50%; it is a core holding, while silver is more industrial and speculative.
Trade Ideas
States we are in a secular shift where long-term Treasury yields will rise, especially in the next recession, breaking the 40-year pattern. Calls the fiscal path "completely untenable" and says higher yields are the "path of least resistance." $2 trillion annual deficits are compounding, and bonds rolling off at ~3.8% will be refinanced at higher rates (4-5%), exploding interest expense. This will force a market-imposed stop, leading to higher yields. Higher yields mean lower prices for long-duration Treasury bonds. He holds near-zero exposure and has swapped to the lowest-coupon bonds to mitigate restructuring risk. A severe economic downturn could trigger a flight-to-quality bid for Treasuries, temporarily lowering yields against his thesis.
Recommends American investors have 100% of their equity exposure outside the US, with his "number one recommendation" being emerging market equities in local currencies. US equities are extraordinarily overvalued (price-to-book more than double ex-US), while foreign investments have started to outperform in real time. He believes we are in the early innings of a multi-year period of foreign outperformance. Significant valuation divergence and the regime shift (falling dollar, rising US yields) favor non-US equities, particularly EM in local currencies. A severe global recession could hit emerging markets harder than the US, reversing relative performance.
Calls private credit an "unmitigated disaster" and "only going to get worse," drawing a direct parallel to subprime mortgages in 2006. The market is opaque, marks are not real (citing an example of the same position marked at 95 vs. 8), and has a fundamental mismatch between private assets and offered liquidity. There is no incremental buyer, only sellers, and redemption requests will surge. A major shakeup is inevitable. Defaults will lead to significant repricing and highlight the incestuous, unhealthy relationship with private equity. A stronger-than-expected economy could delay defaults and allow for a more orderly unwind, mitigating systemic damage.
States "gold is real money" and is "very attractive right now." Believes it will continue to be a strong performer and sees no reason to sell it. Central banks are a huge source of structural demand, potentially increasing their reserve allocation to gold from ~30% to 50%. It is being reintroduced as a legitimate reserve asset class. The combination of fiscal debasement fears, its status as a real asset, and sustained central bank buying provides a strong bullish backdrop. A significant, sustained period of disinflation and fiscal discipline could reduce gold's appeal as a hedge.
Explicitly says "avoid all general obligation munis in California, Illinois, and New York." Cites "absurd spending and tax policies and accelerating revenue erosion." Warns that rules can be changed (e.g., coupons cut, tax status altered) given political trends and wealth inequality, creating unacceptable risk. The risk of legislative or credit impairment is too high. He prefers revenue-backed municipal bonds with a secure income stream. Federal bailouts or a rapid improvement in state finances could stabilize these markets.
Up Next
This Julia LaRoche Show video, published March 27, 2026, features Jeffrey Gundlach discussing UST, EEM, BIZD, GOLD, MUB. 5 trade ideas extracted by AI with direction and confidence scoring.
Speakers: Jeffrey Gundlach · Tickers: UST, EEM, BIZD, GOLD, MUB