Bonds are under pressure. The ten-year Treasury yield recently hit its highest level since 2007. The Fed raised rates earlier this month and has signalled more hikes could come. Oil and gold remain elevated while stocks are still up. Investors are asking whether the classic 60-40 portfolio still works. Here to help break this down is Ted Parkhill, founding partner of Incline Investment Management. Ted, welcome to the show.
Thank you very much. Good to be here.
The ten-year yield recently hit its highest level in nearly two decades. What exactly is the bond market telling us?
The interesting thing about bonds is that we've always viewed them — for the last 40 years — as the area of safety. In a rising rate environment, that may not be true. I'm old enough to remember elevated rates. I remember when I was in high school when rates were like 18%. So I've been around a while. And so we talk about elevated rates now — well, they still could have a long way to go. We actually look forward to that as a systematic trader because we can take advantage of it. Being short bonds is a natural position in this environment. We are short bonds presently — short global bonds, short JGBs, short gilts, short the Bund. That's the kind of exposure most investors have a really tough time finding. Most are not geared up to short bonds. And yet in this environment, that's a completely natural place to be.
How much higher can rates go before stocks and the market really start feeling it?
The new Fed Chair has set a new tone. Despite what the administration was hoping for, we saw rates tick up and that could happen again this fall. If inflation remains elevated, it's completely likely we'll see another rate boost. If that happens, bonds will continue to fall and investors just aren't used to that environment. As a trend follower, our core premise is we don't have a better crystal ball than anyone else. What we do know is that these trends persist. Everyone hopes — and hope is not paved with a lot of fortunes. If you follow the directional moves of the market, that presents opportunity. There are global opportunities right now that US-centric investors are missing.
Oil and gold have both been elevated. What are the commodity markets signalling?
Oil crude is up 75 to 80% year to date. It would be crazy not to follow that trend. There is turmoil in the Middle East and there doesn't seem to be any resolution in sight. But it's not just oil. Gold did really well until it didn't — it's actually down now year to date around 4%. And when you think of commodities, you think everything just goes straight up. That's not true either. Orange juice is down almost 30% year to date. Coffee is down 8%. Lumber is down 13%. Milk is down 30%. Rubber, which we are long, is up 40% year to date. The commodity markets are mixed. What we try to do is cast a very wide opportunity set across different commodities and try to capture those moves.
As we head into the final three months of the year, what are you watching closely?
Three main themes. First, global equities — Korea's index is up 64% year to date, Taiwan is up 65%, the US indices are up double digits. Until these trends slow down, we're going to remain long global equities. Second, being long the US dollar, which has recently strengthened. And third — the big trade — being short global bonds. If rates continue to tick up and inflation remains strong, it just makes sense. That's not something investors can easily do on their own. They're not getting that advice from their advisor or broker. My suggestion is for them to turn to investment managers that can actually take advantage of that trade. We're having a great year because of it — not because we have a crystal ball. It's just because it's obvious. We haven't seen this environment in about 40 years.
Ted, thank you so much for joining us this morning.
Thanks for having me.
