Federated Intermediate Corporate Bond Fund (IS) FIIFX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Corporate Bond
As of 06-30-2018

Highlights

  • Market sentiment driven by geopolitical and trade concerns
  • Federal Reserve (Fed) sees further steady rate increases, but also stronger economic growth and lower unemployment
  • The fund remains in a short duration posture

Looking Back

After peaking at 3.11% in mid-May, the U.S. 10-year Treasury yield retreated to end the quarter modestly above where it started. Markets grew increasingly cautious during the quarter, as optimism from the passage of U.S. corporate tax cuts and first quarter corporate earnings reports faded into worry about geopolitical issues such as Iran, Italy and North Korea, as well as growing trade tensions. President Trump met with North Korean leader Kim Jong Un, pronouncing an end to the nuclear tension on the Korean peninsula. Italy was able to form a government, but only through an odd coalition of parties, which relieved some eurozone concern. U.S. pressure on Iran intensified during the quarter. Perhaps larger than these issues was the growing chorus from Washington against friend and foe alike over “fair” trade. President Trump has indicated he is willing to slap tariffs on foreign goods. Is this a negotiating ploy? It is unclear what his goal is here, but the near-term result is increased worry, manifested in lower Treasury yields. What is clearer is that the Fed views the U.S. economy as being in great shape, with solid growth and a strong labor market. The Fed raised its federal funds rate for the second time this year at its June 13, 2018 meeting, and indicated in its Summary of Economic Projections that it sees two more hikes in 2018. In 2019, the Fed sees continuing solid economic growth, with low inflation, which would likely result in three fed fund increases. It is unclear at this point whether the high consumer confidence, strong labor market and solid corporate profitability will be sufficient to outweigh trade concerns.

During the quarter, Treasury yields rose, driven higher by Fed actions at the very front end. The yield curve bear flattened, as 2-year Treasury yields rose from 2.27% to 2.53%, while 30-year yields ended only slightly higher, at 2.99%. Equities and high-yield debt outperformed Treasuries, while investment-grade and emerging-market debt underperformed. Treasury Inflation-Protected Securities (TIPS) outperformed nominal Treasuries as crude oil and gasoline posted solid gains. Gold, copper and most agricultural commodities fell, while aluminum, wheat and cotton gained. Against a basket of major currencies, the U.S. dollar gained nearly 5%.

In the credit focused sectors for the quarter, the Bloomberg Barclays U.S. Credit Index had total returns of -0.88% with the lower-quality sectors underperforming. Single-A rated sectors had total returns of -0.86% compared to -1.22% for BBBs. In the intermediate area, the Bloomberg Barclays U.S. Intermediate Credit Index (BBICI) had total returns of -0.08%.

Performance

Federated Intermediate Corporate Bond Fund Institutional Shares returned -0.11% at net asset value for the second quarter of 2018. The fund’s benchmark, the BBICI Index, had a total return of -0.08%. The fund’s total return for the period also reflected actual cash flows, transaction costs and other expenses that were not reflected in the total return of the BBICI.

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.

Performance Contributors

  • Strong security selection in the banking, basic industry, insurance and technology industries
  • Specific credits that contributed to performance in the quarter include: Camp Pendleton and Quantico, Teva Pharmaceutical, Ingram Micro and Carpenter Technology
  • Duration was additive in the quarter, while yield-curve positioning was neutral
  • The fund had short interest rate exposure relative to the benchmark

Performance Detractors

  • Poor security selection in brokers/asset managers, utilities and REIT sectors
  • Sector allocation was a detractor in the quarter generally led by overweights in sectors that underperformed the BBICI such as basic industries, other industrials and communications
  • Specific credits that detracted from performance in the quarter included: Nationwide Mutual Insurance, Sky PLC, Allegion and Grupo Bimbo

How We Are Positioned

Following passage of dramatic fiscal changes in late 2017, macroeconomic fundamentals continue to point to solid economic growth, both domestically and around the world. Rising employment and strong consumer confidence undergird the U.S. economy. Potential uncertainty arises from policy and personnel changes in Washington as well as further Fed actions.

Given the spread widening seen year-to-date, some value has been re-established in spread sectors. Our outlook is for economic fundamentals to continue to provide the opportunity for further spread tightening. In keeping with Federated’s alpha pod recommendations, the fund is short its benchmark duration. 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 somewhat constrained in their capital returns to shareholders and ability to increase leverage, unlike many industrial-type credits. The fund is also overweight corporates and underweight the non-corporate sectors relative to its benchmark.