Federated Pennsylvania Municipal Income Fund (A) PAMFX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Muni State Specific
As of 09-30-2017

Municipal Bond Market – Q3 2017

Treasury yields rose modestly during the third quarter of 2017 amid indications of improving U.S. and global growth, heightened prospects for stimulative U.S. tax policy and the beginning of gradual balance-sheet reduction by the Federal Reserve. Continued low inflation and bouts of risk aversion related to potential conflict between the U.S. and North Korea offered countervailing downward pressure on market yields during the quarter. Two-year Treasury yields increased by 10 basis points, while 10- and 30-year Treasury yields both increased by 3 basis points. Municipal bond yields followed a similar pattern, with steady inflows into municipal bond funds and modest new issuance supporting some outperformance for short- and intermediate-term municipal bonds relative to Treasuries. Municipal Market Data (MMD) 2-year AAA tax-exempt yields decreased 6 basis points, while 10- and 30-year AAA tax-exempt yields increased by 1 and 5 basis points, respectively.

The S&P Municipal Bond Index posted a return of 0.99%. The 3-year component of the index returned 0.61%, the 10-year component returned 1.18% and the portion of the index maturing in 22 years and longer returned 0.86%. The AAA/Aaa component of the index returned 0.72%, the A-rated component returned 1.46% and the BBB-rated component returned 2.08%. The S&P Intermediate Municipal Bond Index posted a return of 1.07%. The S&P High Yield Municipal Bond Index posted a loss of 0.08%, but rose 2.26% when excluding sharply underperforming Puerto Rico bonds.

Pennsylvania Market Environment

During the third quarter of 2017, Pennsylvania was the sixth largest state by both population and gross state product. Following decades of a declining manufacturing base, its rejuvenated urban areas have become its economic growth engine. The education and medical sectors have been driving the employment base in these areas. Pennsylvania maintained credit strengths that include a stable and less-volatile economy than the overall U.S. economy, above-average income levels and a pension reform plan which likely will lead to full funding of the Commonwealth’s pension obligations. The contentious political environment did lead to a lengthy stalemate and delayed passage of its 2017 budget. Pension reform passed in 2010 put the pension plans on a path to be fully funded within 30 years, subject to contribution collars limiting increases in annual contributions, although pension will continue to be a key credit issue going forward.

Performance

Investor appetite for yield in the low interest-rate environment increased municipal bond fund inflows and resulted in outperformance of bonds rated “BBB” (or unrated bonds of comparable quality) relative to bonds rated in the higher rating categories (or unrated bonds of comparable quality) of the PAIG3 Index. Bonds in the noninvestment-grade category, below “BBB,” underperformed the higher rating categories. The fund’s overweight position, relative to the PAIG3 Index, in “BBB” (or unrated comparable quality) debt during the quarter had a positive impact on its performance. The fund’s underweight in bonds rated “AAA” (or unrated bonds of comparable quality) also made a positive contribution to performance as bonds in this rating category underperformed the PAIG3 Index.

Performance quoted represents past performance which is no guarantee of future results.

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.

Click the Portfolio Characteristics tab for information on quality ratings.

Strategy

The fund maintained a higher portfolio allocation to Toll Road, Senior Care and Water & Sewer revenue bonds. These allocations negatively impacted the fund’s performance due to the underperformance of these sectors relative to the PAIG3 Index. Also, the fund’s underweight to state and local General Obligation bonds had a negative impact on performance as they outperformed the index during the quarter and the fund was underweight both of these sectors.