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Gundlach Has Long Been Warning of a Debt Bomb: Should You Care?

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Feb. 26 2019, Updated 12:10 p.m. ET

Gundlach on government debt

Jeffrey Gundlach has long been warning markets about the risk that excess leverage in the system poses. During his annual Just Markets webcast on January 8, and as reported by Reuters, Gundlach said that the ballooning US (SPY) (VOO) federal government debt presents a horrific situation, and the United States (DIA) could be at a “tipping point” in a “debt-compounding cycle.” He also feels that the national debt is understated due to missing war expenditures and social security loans.

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Corporate bond market leverage

Gundlach has also been worried about increased corporate leverage. During his interview with Yahoo Finance, he said, “I think the biggest risk– and it may not materialize for a little while longer– is that when the next recession comes, there’s going to be a lot of turmoil because the corporate bond market is extraordinarily leveraged.” He also thinks there is a significant risk of downgrades in the BBB (investment-grade) space (BND), as leverage is nearing record highs.

Things could worsen

While the national debt is a problem, Gundlach believes the situation could get even more complex if a recession comes. The solution, according to Gundlach, could lie in cutting benefits: “When you have $123 trillion of unfunded liabilities, you have to de-commit.”

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