The bond market is showing the same warning signs it gave before the 1987 Black Monday crash, says former Lehman Brothers trader Larry McDonald. His alert lands as S&P 500 futures drop on Middle East tensions and rising bets on another Federal Reserve rate hike ahead of the Trump-Xi summit.
Former Lehman Brothers trader Larry McDonald says the bond market is flashing the same signal it sent before the stock market crashed on Black Monday in 1987. Speaking on the David Lin Report podcast on September 24, McDonald, now founder of The Bear Traps Report, compared today's fixed-income conditions to the summer before the October 19, 1987, crash. The Dow Jones Industrial Average fell nearly 23% in a single session that day.
Corporate bonds are outyielding stocks
McDonald points to corporate bonds from Alphabet and Oracle yielding above 7%, with Oracle's long-term debt in the 7% to 8% range. Alphabet's 100-year bond, issued in February 2026, has already fallen to around 87 cents on the dollar, pushing its yield above 7% as a result.
According to Crypto Briefing, bonds are beginning to "steal market share" from equities, in McDonald's words, as capital gravitates toward fixed income when the yield gap narrows enough to tempt institutional investors. In the summer of 1987, U.S. 10-year Treasury yields climbed to 9.89% while U.K. 10-year gilts hit 10.12%, a setup McDonald says crowded out stocks before the crash.
Energy prices add to the pressure
McDonald also flagged rising energy prices as a factor, since they feed inflation, and inflation weighs on bond prices. He said a further bond-price decline would create exceptional buying opportunities in fixed income, even as he sees elevated energy costs amplifying recession risk.
S&P 500 futures already retreating
The warning comes as Wall Street futures head lower. S&P 500 E-minis were down 44.25 points, or 0.57%, Dow E-minis fell 173 points, or 0.33%, and Nasdaq 100 E-minis dropped 309.75 points, or 1.01%, at 5:25 a.m. ET on Thursday.
Brent crude climbed back above $100 a barrel after US and Iran leaders traded barbs at the UN General Assembly, and the 30-year Treasury yield reached its highest level since 2004. Markets now see a 71% chance of at least a 25-basis-point rate hike next month, up from around 50% a day earlier, according to the CME Group's FedWatch Tool. New York Fed President John Williams said it was reasonable to think rates might need to be raised again this year.
Investors are also awaiting the summit between Presidents Donald Trump and Xi Jinping, where AI regulation, the Middle East conflict, and Taiwan are expected to feature. Treasury Secretary Scott Bessent said Wednesday the two countries agreed to extend their trade truce until January 10.
Sources: Crypto Briefing, Economy News
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