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Gabelli To Bulk Up Treasuries If Rate Hikes Create Value

Gabelli Fixed Income may pour $100 million into short-term Treasuries if yields on the two-year Treasury note back up to 2.75-3%.

Henley Smith

Gabelli Fixed Income may pour $100 million into short-term Treasuries if yields on the two-year Treasury note back up to 2.75-3%. Henley Smith, cio and manager of $1 billion in taxable fixed income in Rye, N.Y., said a Federal Funds rate increase would cause the two-year note to cheapen and would spur him to increase the portfolio's holdings of Treasuries from 15% to 25% of its assets by putting cash to work.


Meanwhile, the manager has been selling off two-year Treasuries and building up cash as he awaits the outcome of the presidential election and the next two Federal Open Market Committee meetings. He sees the two-year note as being too rich at 2.5% as of Oct. 22; the spread to the Fed Funds rate should be closer to 100 basis points, not 75bps, as it is now. "Spreads are tight because people are holding on to their positions; they're hoping the other shoe doesn't drop and there's another terrorist attack," he said.

Smith expects the FOMC will raise interest rates later this month but will pause in December. He believes the FOMC is aiming for the historically neutral rate of 3%, which should be reached by this time next year, he said.

Smith doesn't own paper longer than five years and has been even shorter on the yield curve because of regular rate hikes. He recently shortened his duration of his longer-maturity products from 1.4 to 1.2 years.

The fund is composed of 50% agencies, 15% Treasuries and 5% asset-backed securities, with the remainder in cash. The manager's benchmarks include the 90-day Treasury bill and the Merrill Lynch 1-3 Year Treasury Index.

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