Plurimi's CIO Armstrong: 10-year Treasury Yields To Widen Beyond 4%

Speaking at the Thomson Reuters Lipper European Alpha Expert Forum in London, Armstrong (pictured) said he expected 10-year Treasury yields, which are currently at 2.3%, to reach 4.2% in the near future, far beyond veteran bond investor Bill Gross's 2.4% yield barrier, which could signal a bond bear market.

This also exceeds forecasts in a recent Cross-BorderCapital report entitled Why are the bond bears growling?, which suggested 10-year Treasury yields could rise to 3.5% due to the "renormalisation of cross-border capital flows" to Europe and China.

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Armstrong said: "You will go from an environment where China, Japan and the ECB did not care about the yield [when purchasing bonds], to where you have to attract investors to buy bonds with [a higher] yield.

"Also, interest rates will move much higher than the market is expecting and a 4% yield is not a shocking end point."

The Federal Reserve has raised rates three times since its first hike for over a decade in December 2015, and the CIO said investors were "naïve" to think they will be not be affected by this and the quantitative tightening (QT) cycle; the Fed has also begun tapering its $4.5trn balance sheet, which it started in October, on the back of "good" US economic performance.

Armstrong said: "The beginning of QT from the US has been signalled relatively well. Investors know it is coming so it will not shock markets.

"But what we had was an eight-year tailwind from QE that will turn into an eight-year headwind from QT.

"I do not see why the fortunes work in [just] one direction," he said. "It is naïve to think as it turns into tightening those forces do not work in the opposite direction."

US valuations

Turning to his equity positioning, Armstrong, who manages the Plurimi Global Macro Diversified Dynamic Solution fund, said he had a 22% net short position in US equities due to "extreme valuations".

He pointed to the Shiller P/E ratio of 31.6, the highest point in history barring the lead-up to the dotcom crash in 2001 and Black Tuesday in 1929.

While this position has caused some pain this year, he recognised asset prices had been driven by central bankers' QE programmes.

Furthermore, he said increasing deregulation and President Donald Trump's aim of US growth reaching 3% would result in an overheating economy and not structural long-term growth.

"It is an expensive multiple," he said. "Our portfolios have been skewed to short US equities, which has not been good this year but will come good.

"Short-term valuations do not mean anything when you are looking at five to ten-year periods."