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Strategist Jim Paulsen: Yields Could Rise to 3.5% by Friday

This article was originally published on ETFTrends.com.

Yields for the U.S. government debt space are now following U.S. equities in the extended bull run with the benchmark 10-year Treasury note yield reaching a seven-year high, scooting past the 3.2% mark before settling to its current level of 3.189 as of 1:30 p.m. ET. On Friday, wage data is expected to be released and if they rise, this could shoot yields past 3.5%, according to Jim Paulsen, chief investment strategist at Leuthold Group.

"We probably put wages over 3 percent, then you're probably looking somewhere between three-and-a-quarter and three-and-a-half" percent on the 10-year yield, said Paulsen.

In addition to the 10-year, the benchmark 30-year yield also ticked higher to 3.348 as did shorter duration yields, such as the five-year yield heading higher to 3.048 and the two-year yield rose to 2.88.

Helping to boost yields today was positive jobs data as the Labor Department revealed that unemployment claims last week fell to a 49-year low, pointing to sustained strength in the labor market. Claims for unemployment benefits fell to 207,000, besting the forecasted 213,000 by a Reuters poll of economists.

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The unemployment data came after yesterday’s positive news that private payrolls grew stronger than expected in September with 230,000 positions added. The private payrolls total easily bested the 168,000 jobs added in August–more than the 185,000 expected by a survey of economists and the highest number of payrolls added since the 241,000 added in February.

Furthermore, the U.S. services sector grew last month at its fastest pace based on data released by the Institute for Supply Management. The ISM non-manufacturing index ticked up to 61.6, which represents its highest level since 2008, beating out a poll of economists expecting the index to show 58 for the month of September.

According to analysts, all this strength in the labor market and the economy in general is beginning to prop up government debt yields, which doesn't portend to any concerns if tomorrow's wage data in fact rockets yields past the 3.5% mark.

"We haven't had a back-to-back hot wage number in I don't know how long," Paulsen said Thursday in a "Squawk on the Street" interview. "If we do that (again), you wonder how high yields could go."

Short-Term Fixed Rate Bonds Lagging Floating Rate Bonds

With government debt yields on the move and more Fed rate hikes on the horizon, fixed-income investors can counter effectively with an ETF that invests in floating rate notes, such as the VanEck Vectors Investment Grd Fl Rt ETF (FLTR) or the  SPDR Blmbg Barclays Inv Grd Flt Rt ETF (FLRN) .

With three rate hikes already experienced through the first two quarters of 2018 and the prevailing sentiment circulating within the capital markets that more is to come, bond investors can incorporate fixed-income ETFs into their portfolios that can adjust with rising rates. This floating rate component gives investors adaptability in the current economic environs where rising rates are prevalent by taking advantage of these short-term rate adjustments rather than earning a fixed return.

"If your intention is to reduce interest rate exposure while managing for income it may be time to consider floating rate notes," said VanEck in research note. "Rising rates are a potential headwind even for short-term bond funds. With an average duration of 2.731, a 1% increase in rates could still mean a price decline of 2.73%. As short term interest rates have continued to rise, short-term fixed rate bonds have lagged floating rate notes."

"Yields on floating rate notes are now comparable to fixed-rate short-term bond yields, but with much lower interest rate duration. Floating rate note coupons reset quarterly, adjusting automatically with rates and maintaining a near-zero duration profile," added VanEck.

FLTR seeks to replicate the price and yield performance of the MVIS® US Investment Grade Floating Rate Index, which is comprised of U.S. dollar-denominated floating rate notes issued by corporate entities or similar commercial entities that are public reporting companies in the United States and rated investment grade.

FLRN seeks to provide investment results that correlate with the price and yield performance of the Bloomberg Barclays U.S. Dollar Floating Rate Note < 5 Years Index. FLRN limits duration exposure with investments in debt securities with maturities that don’t exceed five years.

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