Larry McDonald, a former Lehman bros. trader, said bonds yields are starting to resemble their set-up during the summer of 1987.

Bond yields are starting to deliver "equity-like returns" and it's bad news for the stock market, according to former Lehman Bros. trader Larry McDonald.

He said in a episode of The David Lin Report podcast that he is seeing parallels between the current landscape and the months before Black Monday, or the stock-market crash of 1987.

Stocks peaked in the August of that year, McDonald, the founder of The Bear Traps Report, an independent macroeconomic research platform, explained. The Dow Jones Industrial Average DJIA reached an all-time high that month before recording its largest one-day percentage decline of almost 23% just two months later. And he noted during that summer, bonds started to offer "equity-like returns."

In the U.S., yields on the 10-year Treasury BX:TMUBMUSD10Y reached as high as 9.89%, while the U.K. 10-year gilt yield BX:TMBMKGB-10Y climbed to 10.12% in 1987.

In terms of today's market, during the COVID pandemic years, central banks bringing interest rates close to zero impelled companies to issue long-term bonds with relatively low yields, like Apple's 2.55% bond, which matures in 2060. But when central bank started hiking rates again, newly issued bonds offered much higher yields, forcing the older ones to sell at a discount. For McDonald, buying these low-coupon bonds offers potential for significant returns.

"Why should someone watching us right now care about this? You can get potentially equity-like returns in bonds and that starts to steal market share out of the market," he said.

For example, McDonald said, Alphabet (GOOGL), the owner of Google, issued GBP1 billion ($1.32 billion) in a 100-year bond near par in Feb. 2026. But over the summer, its price moved down to about 87% of its original value, which pushed the yield above 7%.

He added that Oracle (ORCL) has similarly seen the yields on its long-term bonds spike to between 7% and 8%. So using the "rule of 72," which involves dividing 72 by a given interest rate, an investment would double in nine years, McDonald said.

"If your money is doubling in nine years, that's an equity-like return," he said. "It starts to steal market share from equities."

And while one more leg down in bonds would present an "incredible buying opportunity," McDonald said, surging energy prices are continuing to heighten the risk of recession.

-Nora Redmond