10-year bond levels and next move for the stock market, according to Jim Bianco

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The S&P 500 just ended its worst day since May on Monday, accelerating a collapse in September triggered by China’s Evergrande debt crisis, seasonal weakness and an impending deadline to raise the debt ceiling.

These concerns have contributed to the market malaise, but Bianco Research President Jim Bianco said the next market move returns to a central theme: interest rates.

He told CNBC’s “Trading Nation” on Monday that he was looking to the Treasury market to find out if this sale was going to get worse or if it was just an incident.

“If you have this correction with interest rates remaining sticky or maybe even trending upwards, I think that would be the wake-up call for investors. If the bond market behaves the way you should. Expect there in the next few days when interest rates drop with falling stock prices, then I think you would breathe a little sigh of relief as we are probably entering a lull of capitulation, ”he said.

Lower Treasury yields would suggest a flight to quality supply, meaning investors stack up on bonds rather than stocks as the S&P 500 falls, he added. He said the 10-year decline to a level of around 1.25% would bring that sense of relief.

On the other hand, if the 10-year goes to 1.38% or more, it would suggest to it that investors are worried about “lingering inflation” and a Federal Reserve being forced to go faster than much. don’t think so. Fears of a Fed cut loomed as a threat on Wall Street even as stocks hit record highs.

The US 10-year rate was trading at around 1.31% on Monday. It fell to 1.13% in early August.

While the Fed has maintained that it views the rise in inflation as transient, Bianco sees signs that it may stick around longer. For example, without the reopening components of the Consumer Price Index such as airline tickets and restaurants, he says inflation looks much higher.

“Take out all that reopening stuff and you still have an inflation rate of around 3.5% which is too high for the Federal Reserve as well and if the market starts to believe the inflation rate is going to stay around. 3%, maybe a little higher, maybe slightly lower, this is unacceptable for a note of 1.3% at 10 years and that could pose real problems for the bond market “, he said. declared.

The Federal Open Market Committee is scheduled to begin its two-day meeting on Tuesday. A tariff decision will be announced Wednesday afternoon.

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