Happy New Year! Cooper Capital ended 2014 on a high note, thanks in part to a long rally in the bond market. We have seen a large jump in values recently, which is always nice as long as we keep things in perspective. That perspective is that bond prices are currently inflated, and some economists predict a correction, or decline, coming in the future. Indeed, if the Federal Reserve does as predicted and raises the Federal Funds rate in June, the intended effect would be for bond prices to fall.
Recently, however, many indicators are working against the Fed’s plan. Globally, economies continue to struggle. The Euro is in danger of deflation, while the Japanese Yen is already there. The ECB is considering further stimulus measures to try to stave off a looming relapse into recession. While the U.S showed good growth in the second half of 2014, it is impossible for the nation to be unaffected by what is happening elsewhere in the world.
Additionally, some domestic indicators are starting to show signs of a struggle. The severe drop in oil prices, though producing smiles at the gas pumps, has led to a downturn in the energy industry. It has resulted in stock losses and job losses, and further hampered the Fed’s goal of increasing inflation to two percent. Indicators like factory orders and hiring slowed their growth rates last month.
All this adds up to make a somewhat fuzzy picture. It’s hard to see what is coming. On the one hand, the U.S. economy had strong growth, especially in the third quarter of 2014. On the other hand, we are not an island, and the rest of the world continues to flounder. And while there are those who believe there will be a correction in bond prices, the 10 year Treasury note’s price rallied this week, resulting in a yield under 2% for the first time since October.
At Cooper Capital, we remain comfortable with our strategy through this volatility. Remaining focused on the long term allows us to take it all in stride. If bond prices do fall, we may see statement values come down some, but this is not an unreasonable expectation considering the recent rally. We anticipate yields to remain high despite any possible value fluctuations. Over the past six months we’ve managed to purchase many high yielding bonds at discounts – both inverse floating and fixed rate bonds. Cash flows remain consistent, allowing us to continually adapt portfolios in these changing markets.
2015 has started off interesting, to say the least, but we look forward to another successful year. If you have any questions, please feel free to contact us, and as always, thank you for placing your trust in us at Cooper Capital, Inc.
This information is not intended to be used as the only basis for investment decisions, nor should it be construed as advice designed to meet your particular needs. You are advised to seek the advice of your financial adviser, legal or tax professional, prior to making any investment decision based on any specific information contained herein.
