Federated Intermediate Corporate Bond Fund (IS) FIIFX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Corporate Bond
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 expanding 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 that it expects to raise its federal funds 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.

The broad investment-grade U.S. bond market, as measured by the Bloomberg Barclays Aggregate Index, posted a solid total return of 0.85% in the third quarter. The S&P 500 gained over 4% in the quarter, while according to Bloomberg Barclays data, emerging-market debt gained 2.7%, high yield nearly 2% and investment-grade credit 1.35%, led by long maturity and BBB-rated credit. The Bloomberg Barclays Intermediate Credit Index returned 0.99%. Other high-quality sectors, such as mortgage-backed securities (MBS), produced lower, but still solid, total returns. Treasury Inflation Protection Securities (TIPS) outperformed nominal Treasuries, as crude oil and retail gasoline prices rose over 12%.

Performance

Federated Intermediate Corporate Bond Fund Institutional Shares returned 1.09% at net asset value (NAV) for the third quarter of 2017. The fund’s benchmark, the Bloomberg Barclays U.S. Intermediate Credit Index, had a total return of 0.99%. Fund returns in the quarter were driven primarily by security selection. Secondarily, duration was only slightly additive, while sector allocation and yield curve were roughly neutral.

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.

Click on the Portfolio Characteristics tab for information on quality ratings and the fund’s top 10 holdings.

The investment-grade corporate bond environment remains solid. Earnings growth for the full year 2017 is expected to be in the high single-digits and profit margins remain strong. The long-term trend of rising corporate leverage has recently paused. On the technical side, demand remains robust for new corporate bond issuance. Lower-rated credits continued to perform well in the current 2.0% plus or minus gross domestic product (GDP) growth environment. BBB-rated corporates returned 1.24% in the quarter, while A-rated entities returned 0.96%. The funds overweight positioning in BBB-rated credits, as well as positive security selection benefitted from the rally. The sectors that were the most positive were brokers, capital goods and energy, while the sectors that detracted were Real Estate Investment Trusts (REITs), communications and banking. The portfolio was underweight supranationals, which handily underperformed the benchmark, and thus was also a positive contributor. Securities within those sectors that contributed were Marathon Petroleum, Embraer and FMR. Securities that detracted include AT&T, WPP Finance and Equifax.

Positioning and Strategy

On the security selection side, the fund remained overweight the BBB-portion of the investment-grade corporate bond market. The fund also maintained its positioning in Financials as they remain attractive from a fundamental perspective. Financials should benefit from higher interest rates, have stable-to-improving fundamentals and are constrained in their capital returns to shareholders, unlike many industrial-type credits. The fund is also overweight corporates and underweight the non-corporate sectors relative to its benchmark. The fund ended the quarter with a short duration posture.