Investors should prepare for a near 1 percentage point increase on the U.S. 10-year sovereign bond yield before the end of 2018, according to one investment manager, who cited robust wage growth and tightening monetary policy.
The 10-year U.S. Treasury note is a benchmark government bond that helps set prices for debt instruments all over the world, including U.S. mortgages — making it a critical asset to track for those seeking to invest. This means that when the yield moves higher consumers are likely to have less money available to spend as mortgage repayments rise. It also means that firms will face higher costs on their debts and thus offer fewer returns for equity investors or curb expansion.
According to one investment manager there could be a large increase in U.S. interest rates before year-end, provided a trade war does not escalate.
“I think we are above 3.5 percent by year-end … And if you push me I think 3.75 percent,” Patrick Armstrong, chief investment officer at Plurimi Investment Managers, told CNBC’s “Squawk Box Europe” Friday.
On Friday morning, the yield on the 10-year Treasury note stood at 2.8327 percent.
“I think we are going to move away from fear of trade wars to actually, we are moving on and things are positive,” Armstrong said.
“I think people are ignoring how strong the U.S. economy is and how potentially inflationary the U.S. economy is,” he added, mentioning robust wage growth in the U.S. as a sign of health in the country’s economy.
He also pointed to a key core inflation indicator — the underlying inflation gauge from the Bank of New York Federal Reserve — which currently stands at 3.6 percent, as another sign that inflation will rise during the coming months.
Robust wage growth and rising core inflation point to a potential further tightening of monetary policy by the Federal Reserve, which then translates into higher yields on U.S. Treasurys.