Bill Gross, the PIMCO cofounder who revolutionized bond investing with active trading strategies, warned that the overall credit landscape has become unbalanced and cautioned against holding longer-term debt.

In a Financial Times op-ed published Wednesday, Gross noted that government, mortgage, and corporate credit now totals about $84 trillion.

"Too much debt can lead to too much risk and too much equity can lead to less earnings per share growth under certain underperforming productivity cycles," Gross wrote. "Move them both at the same pace consistent with industry standards and economic growth more than likely expands as well."

Balance sheets, however, have grown too lopsided, putting growth at risk, he said. The AI sector's debt boom is an anomaly by historical standards, and federal debt has already hit peak levels for peacetime, now standing at 100% of GDP — meaning the government's outstanding debt roughly equals the value of everything the U.S. economy produces in a year. While all that debt is fueling growth now, it has driven higher inflation today and will likely slow growth in the future, Gross added.

"In such an environment, my view is: don't own bonds, with the exception of one-year Treasury bills, which are now at 4.55%," he said. "Be cautious with stocks at record levels as higher yields over time will contract profit margins. Be prepared for the end of 'what you are used to' stock markets and higher volatility in prices for the benchmark 10-year Treasury bonds."

The admonition is notable given Gross's career in bond investing, which earned him the moniker "Bond King". For decades, he dominated a corner of financial markets that was considered sleepy before he arrived on the scene. Under his management, PIMCO's Total Return Fund grew into the world's largest bond fund, and rather than simply buying bonds and holding them to maturity to collect interest, his investment strategies generated returns well beyond what "clipping coupons" provided.

But in recent years, the bond market has undergone its own transformation. Central banks around the world no longer reliably buy and hold Treasury debt as they seek to diversify their reserves. At the same time, price-sensitive hedge funds have emerged as bigger players in the bond market and are quicker to sell. That shift in ownership matters beyond trading desks: Treasury yields serve as the reference point for borrowing costs across the economy, influencing everything from corporate loans to mortgages.

The so-called basis trade that has become popular among hedge funds, in which they profit from small price differences between Treasury bonds and Treasury futures, has made the market more volatile. The basis trade has grown so much that hedge funds' share of total Treasury holdings has almost doubled since 2023 to 8.5%, exceeding the portion commanded by depository institutions and mutual funds. The leverage embedded in that positioning is the pressure point analysts flag: as funding conditions tighten, unwinding those positions can force sales and drain liquidity in times of stress.

The new era of volatility has been on display this year, with 10-year Treasury yields soaring more than 100 basis points since the Iran war started and recently hitting their highest levels in 24 years.

While hedge funds are a key source of liquidity in the market, they may weaken bonds' reputation as a safe-haven asset, Joe Maher, markets economist at Capital Economics, said in a note in August.

"In a risk-off environment, safe-haven flows into sovereign bonds may be offset by hedge funds unwinding their leveraged trading positions as funding conditions tighten," he wrote. "And given they have no obligation to act as market makers, the more likely it is that liquidity dries up in these markets in times of stress."

Maher also warned that hedge funds could transmit stress across different assets. A stock market selloff, for example, could force hedge funds to dump bond positions to cover their losses in equities. For readers tracking how this plays out, the levers to watch are the ones both Gross and Maher point to: the size of hedge fund positioning in the basis trade, central bank reserve decisions, and the funding conditions that determine whether leveraged positions can be unwound smoothly.

For his part, Gross said he is suspicious of AI hyperscalers unless they have price-to-earnings ratios of less than 20. And while stocks such as Verizon and AT&T have decent yields, their mobile phone businesses are threatened by SpaceX's Starlink. Some income funds trading at a discount to net asset values may offer some opportunities, he added, but they would suffer if short-term interest rates rise higher than expected.

"Preserve and protect is my current investment motto," Gross wrote.

This story was originally featured on Fortune.com.