Need to Know: Bond yields aren’t going any higher, and if they do, stocks will crash, says James Bianco

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This time it’s different?

U.S. stocks have proved Teflon-esque bouncing back from politics, trade and economic worries, but the sellers look ready to stick around after Tuesday’s shocking U.S. manufacturing data and subsequent market fallout. Stock futures and global equities are deep in the red for Wednesday.

Expect lots of attention to fall on private-sector payroll data later ahead of Friday’s bigger jobs data. Some may be looking further out to U.S.- China trade talks and a Federal Reserve decision later this month — bets on a rate cut are growing — to cheer up stocks.

As stocks fell Tuesday, investors seeking a haven from economic concerns flocked to bonds, which drove yields down and prices higher. Our call of the day, from the president of Bianco Research, James Bianco says investors shouldn’t wish for higher yields —a potential disaster for stocks.

The 30-year Treasury note TMUBMUSD30Y, -0.58%  is yielding around 2.19%, making it the only interest rate left among G-20 developed countries above 2%, he says.

“That is a high yield, that’s what you dream for,” Bianco tells MarketWatch in an interview. “The 30-year bond is up 22% this year, it’s well ahead of the S&P. Especially if you look at negative yields in Europe, this has been one of the best years in history to own fixed-income securities, especially investment grade from a return perspective.”

Bianco is convinced rates could go ever lower for several reasons, such as the absence of inflation as Amazon AMZN, -0.01%  and others in that retail space drive down prices of goods, central banks push interest rates further into negative territory and the global economy slows.

But he thinks lots of investors haven’t come to grips with that notion. “A lot of people still think that safe, risk-free investment should still yield them 4% or 5%. “But your reward for getting a 4% or 5% yield again is going to probably be a 30% or 50% decline in the stock market.”

“I don’t think the world can handle high rates anymore,” Bianco said, recalling how a year ago, the yield on the U.S. 10-year bond TMUBMUSD10Y, -1.05%  hit 3.25%, and the S&P 500 fell nearly 20%. When the Fed backed off interest rates and promised to be patient in early January, the market rebounded.

“What we showed was we went to 3.25% for a couple of weeks and the U.S. stock market broke,” he said. “I don’t think there’s any way we can get to 4% or 5%, without this creating a lot of damage.”

Read: Here’s how the rest of the year goes after an ugly October start for stocks

The market

Dow YM00, -0.59%,  S&P ES00, -0.58%  and Nasdaq NQ00, -0.69%  futures are down by nearly 0.5% each. Oil CLX19, +0.15%   and gold GCZ19, +0.64% are flat and the dollar DXY, +0.06% is up.

European stocks SXXP, -1.84% are tanking, while Asian equities ADOW, -0.80% also pulled back. Korea’s KOSPI 180721, -1.95%  slid 1.5% after North Korean fired a missile into the sea.

Read: Ray Dalio warns U.S. may have to go further than just cutting capital flows to China

The chart

One reason to worry about the Institute for Supply Management Manufacturing Index that dropped to a more-than-decade low in September? Close correlation with year-over-year growth of the S&P 500, notes Robeco portfolio manager Jeroen Blokland in a post.

While these two have diverged in the past, he said the S&P would need to fall by 13% to reach where the ISM currently sits.

The buzz

One more worry for investors? ADP employment came in below forecasts. New York and Philadelphia Fed Presidents John Williams and Patrick Harker will each make appearances.

Facebook FB, -1.27%  is reportedly struggling to keep its cryptocurrency-based payments network, Libra, on track after backers such as Visa V, +1.33% and Mastercard MA, -0.23%  appear to be getting cold feet.

Real estate group Lennar LEN, -0.23%  and retailer Bed Bath & Beyond BBBY, -3.01%   will report results.

Johnson & Johnson JNJ, +0.47%  has settled two Ohio opioid lawsuits for $20 million, to avoid the first federal trial over the crisis. The company said the deal was not an admission of liability .

The stat

$3.5 million — That’s how much a Houston businessman has bet on the Astros winning Major League Baseball World Series. And he’s got a lot to lose.

Random reads

Hurricane Lorenzo lashes small Portugal islands, heads toward Ireland, U.K.

Invoking the memory of his mother, Prince Harry backs wife’s lawsuit of British tabloid

New poll points to CNN, Fox News as most polarizing brands in the U.S.

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