As of 12-31-2017


  • Passage of tax reform bill supports a risk-on environment for financial markets
  • Credit spreads below median, but room to tighten further on possible Fed moves and continued economic growth
  • Security selection aids performance; overweight to high-yield detracts

Looking Back

The fourth quarter of 2017 was much like the full year in that financial returns from higher-beta risk assets were stronger than those from less risky assets. The passage of the tax reform bill drove the increased risk appetite evident in the financial markets. During the fourth quarter, the yield on the 10-year U.S. Treasury rose from 2.33% to 2.41%, after briefly touching 2.50% in mid-December. The Treasury yield curve continued to flatten, as front-end yields rose more than yields of longer maturities. Risk assets outperformed, led by equities, copper and crude oil, as high yield, emerging markets (EM), investment-grade debt and gold posted small gains, while Treasuries had very modest returns and Treasury Inflation-Protected Securities (TIPS) outperformed Treasuries.

As mentioned, with the back-up in interest rates, total returns for fixed-income sectors were positive, but more modest than equities. The theme of risk-on still applied, however. Bloomberg Barclays US Corporate High Yield Index had total returns of 0.47%, Bloomberg Barclays EM Seasoned ex Aggregate/Eurodollar Index increased 0.61% and the Bloomberg Barclays U.S. Credit Index rose 1.05% with the BBB quality sector adding 1.23%.


Federated Bond Fund Institutional Shares returned 0.82% at net asset value (NAV) for the three months ended Dec. 31, 2017. That compares with the Bloomberg Barclays U.S. Credit Index return of 1.05% and the Bloomberg Barclays U.S. High Yield 2% Issuer Capped Index return of 0.47%. The Blended Benchmark, consisting of 25% of the Bloomberg Barclays U.S. Credit Index and 25% of the Bloomberg Barclays U.S. High Yield 2% Issuer Capped Index, returned 0.90%. The fund’s total return for the period also reflected actual cash flows, transaction costs and other expenses that were not reflected in the return of the Blended Benchmark.

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.

Performance Contributors

  • Short duration relative to Blended Benchmark in general rising-rate environment
  • Overweight to BBB-rating category
  • Strong security selection in the Communications, Insurance and REIT sectors
  • Specific issuers held by the portfolio that outperformed the Blended Benchmark included: Prologis, Frontier Communications, Canadian Natural Resources and Goldman Sachs

Performance Detractors

  • Overweight position to high-yield asset class
  • Slight steepening bias in a period in which curve flattened
  • Security selection in the Pharmaceutical, Retail and Electric Utility sectors
  • Specific issuers held by the portfolio that underperformed the Blended Benchmark included: TEVA Pharmaceutical, PetSmart and Remington Outdoor Company

Click the Portfolio Characteristics tab for information on quality ratings and the fund's top ten holdings.

How We Are Positioned

Macro fundamentals remain positive with improving U.S. and global economic growth. Earnings for the full-year 2018 are expected to grow in the low double digits, with profit margins remaining strong but potentially coming under pressure if wages rise faster than expected. On the technical side, demand remains robust for corporate bond issuance and new supply is expected to decline slightly year-over-year.

The portfolio continues a down-in-quality bias, with overweight positions in the high-yield asset class and the BBB-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 portfolio remains committed to adjust the overall sector positioning in response to changes in valuation and credit quality.