Gabelli Looks To Buy Floaters

Gabelli Asset Management is looking to invest about $250 million in floating-rate securities, with a focus on adding agency floaters to add flexibility in anticipation of an increase in interest rates. Henley Smith, portfolio manager of a $1.5 billion fund, says he plans to reduce the fund's 25% cash position by adding agency floaters, which now also account for 25% of the fund. Smith explains that he plans to add floaters, including agencies and asset-backeds, and not fixed-rate Treasuries because he thinks T-bills are expensive in the current market. For example, Smith notes that two-year Treasuries, a typical benchmark for money market fund managers, are now around 65 basis points over the Fed funds rate, which he calls expensive. An attractive rate would be around 100 basis points over, he adds. Smith has moved to floaters from Treasuries in the last few months and says he does not plan to invest in fixed returns in the coming months because his assessment suggests that interest rates my go up marginally later this year. The recent fall in the consumer confidence index, and the resulting rise in the price of government bonds, has not changed Smith's perception of the market, and he notes that even a marginal improvement in the job recovery data can bring the bond market under pressure and push spreads on Treasuries wider. The fund holds 25% in five-year Treasuries and 25% in asset-backed floaters.

The fund's duration is neutral that of its benchmark, a short-term Merrill Lynch government index.