“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 (NYSEArca: FLTR) or the SPDR Blmbg Barclays Inv Grd Flt Rt ETF (NYSEArca: 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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