As of 09-30-2017

Market Overview

Moderate economic growth and low inflation in the U.S. contributed to a strong environment for financial returns during the third quarter. Steady job gains, low unemployment and rebounding consumer confidence led to expanded household spending. Reflecting these improvements, U.S. Treasury yields rose during September after having fallen during the first two months of the quarter. Geopolitical fears, from North Korea to German elections, did not derail the increasing signs of global reflation and stronger growth. In June, global central banks had retreated from their more hawkish tone, only to take comfort in stronger growth signs by the end of the quarter. The Federal Reserve (Fed), in its September meeting statement, made clear it expects to raise its federal funds target rate again in 2017 and three times more in 2018, and will begin to reduce the size of its balance sheet in October. The Fed sees a lower long-term rate than it had previously, primarily because of continued low inflation, though it is at pains to understand why. Global central banks face a relatively uncommon, but now welcome, problem of major economies expanding simultaneously. How they react will be crucial.

During the period, the Bloomberg Barclays U.S. Treasury Index generated returns of 0.38% as yields across the Treasury curve were minimally changed. U.S. credit markets posted healthier third-quarter returns, with the Bloomberg Barclays U.S. Credit Index generating a return of 1.35% and the Bloomberg Barclays U.S. High Yield Index 1.98%.

Performance

Federated Bond Fund Institutional Shares returned 1.49% at net asset value for the third quarter of 2017. The fund’s performance compares to a return of 1.51% for the Blended Index (no associated fees), consisting of 75% of the Bloomberg Barclays U.S. Credit Index and 25% of the Bloomberg Barclays U.S. High Yield 2% Issuer Capped Index.

Performance data quoted represents past performance which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than what is stated. Other share classes may have experienced different returns than the share class presented. To view performance current to the most recent month-end and for after tax returns, click on the Performance tab.

Click the Performance tab for standard fund performance.

Fund performance was driven by security selection and sector allocation. Positive security selection within the capital goods, communications and insurance industries was partially offset by weak security selection within basic industries, energy and REIT industries. Positive sector allocation was derived from overweight positions to the high-yield asset class and within the lower-rated categories within the investment-grade asset class. The high-yield asset class return of 1.98% outperformed investment grade’s 1.35% and the above-neutral (25%) allocation to high yield was beneficial to overall fund returns. The lower-rated categories of the investment-grade asset class also generated solid returns during the period. As points of reference, the BBB category produced a return of 1.63%, the A category 1.26%, the AA category 1.09% and the AAA category 0.63%. Therefore, the down-in-quality bias within investment grade was also a positive contributor to fund performance during the period. There was minimal impact to period performance as a result of duration and yield curve positioning.

Click the Portfolio Characteristics tab for information on quality ratings.

Positioning and Strategy

The fund continues a down-in-quality bias, with an overweight position in the high-yield asset class and an overweight position within the Baa-rating category within the investment-grade asset class. Duration exited the period at approximately 96% of Blended Benchmark duration to express the general expectation for an upward trajectory in rates. The fund remains committed to adjust the overall sector positioning in response to changes in valuation and credit quality.