October and the final quarter of the year are kicking off with more stress in the bond market, as yields for 10- and 30-year Treasurys hit 2002 highs. As a result, stocks are setting up for a mixed open. What has been notable to some investors since pressure on bonds increased last month, is that stocks haven’t suffered deep declines such as seen in past similar episodes.
Our call of the day comes from the investor known as the bond king, Jeffrey Gundlach, who likens stock markets to a hollow tree that’s about to break. In an interview with David Rosenberg of Rosenberg Research, Gundlach relayed the story of a 100-year-old silver maple tree at his house in Buffalo, New York, which lost a giant limb, nearly hitting the chimney. What he soon realized was that the tree thought to be in decent shape a year ago, was actually “on the edge of complete failure,” as he realized it was completely hollow.
He noted that as the S&P 500 is near record highs, fewer companies are participating, creating what is known as poor breadth. According to MarketWatch calculations, 80% of S&P 500 companies are at least 10% below their 52-week high — in other words, they’re in a correction — and 39% are at least 20% below. He explained a growing circular investment, in which private-equity firms buy a private-credit unit and then buy an insurer, which in turn buys the loans from the affiliated private-credit company.
Gundlach said those private equity and credit firms keep assuring investors there are no problems, and their quarterly figures often won’t reveal any issues. However, he pointed to one private-credit fund that held assets marked at $100 late last year, then lowered them to between $77 and $78 by the first quarter, meaning the underlying portfolio dropped in value by about 23%. And those funds hold thousands of diversified loans, therefore revealing major hidden losses, he said.
Investors are also increasingly facing stress around the soaring U.S. deficit, said Gundlach. The U.S. government has two not-great choices — printing money or restructuring that debt, in which holders of Treasurys would have to accept longer maturities on bonds or lower interest payments, or coupons. Both are inflationary, he said.
That’s as bond yields rise as the war in Iran pushes up energy prices and a “monumental amount of bond issuance” globally is hitting the market, compounded by artificial-intelligence companies looking to pay for build-outs of the technology. Rising debt issuance is only stacking up interest costs for the government, which may have to pay for it through printing money or trying to manipulate longer-term yields, which will ultimately hit the dollar . He noted that over a dozen prior S&P 500 pullbacks since 2000, the ICE Dollar Index has gained 8% to 10% each time, but after the April correction of 2025, the dollar went down for the first time.
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