As of 03-31-2018

Highlights

  • Global economic growth continued to accelerate, but increased market volatility stoked by inflation fears and uncertainty regarding global trade disputes created a difficult environment for both stocks and bonds
  • All fixed-income sectors with the exception of floating-rate bank loans experienced negative returns in the quarter
  • The yield curve continued to flatten in response to continued gradual Federal Reserve (Fed) tightening as yields at the front end of the curve increased significantly while the long end was relatively subdued
  • The U.S. dollar continued its year-long trend of depreciation against most currencies

Looking Back

The year began with very high investor optimism as the economy and markets had all realized healthy gains in 2017. January saw investors embrace risk assets, pushing equity markets to new highs and credit spreads to cycle tights despite modestly rising interest rates. However, by the end of January, the markets turned more cautious as rates continued to increase on growing expectations that inflation could begin to rise more rapidly, possibly leading to a quicker pace of Fed tightening. Throughout February, stock prices and prices of Treasury bonds, which are typically negatively correlated, became positively correlated and reached their relative lows for the year at the end of the month. Markets continued to be volatile throughout March as investors became increasingly concerned that escalating trade tensions between the U.S. and China could begin to erode the global economic growth story.

The backdrop of rising interest rates, increased market volatility and increasing credit spreads created a very challenging environment for fixed-income assets. High-quality assets such as U.S. Treasuries and agency mortgages had negative returns as interest rates increased. Spread products such as high-yield debt, investment-grade corporate bonds and emerging-market (EM) debt experienced negative excess returns as risk premiums increased during the quarter. The one exception within the fixed-income markets was in the bank loan sector. For the quarter, bank loans as measured by the Credit Suisse Leveraged Loan Index had a positive return of 1.58%.

Fund Performance

Federated Strategic Income Fund Institutional Shares had a total return at net asset value of -1.20%, slightly underperforming the 35% Bloomberg Barclays U.S. Mortgage Backed Securities Index/40% Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index/25% Bloomberg Barclays Emerging Markets USD Aggregate Index with a return of -1.13% during the quarter. The fund’s return significantly outperformed the Bloomberg Barclays Aggregate Bond Index, a commonly used barometer of performance for the broad high-quality bond market, which returned -1.46% during the quarter.

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

  • Following a strong rally in the high-yield market in January, we made a tactical reallocation from high-yield bonds to bank loans, which had a positive impact on the funds sector performance
  • Portfolio duration maintained shorter-than-benchmark duration
  • Good security selection within the international bond holdings

Performance Detractors

  • Overweight allocation in EM, investment-grade corporates and equity
  • Slight negative from security selection within the high-yield holdings
  • Slight negative from yield-curve positioning

How We Are Positioned

We expect that the elevated market volatility that emerged during the first quarter will persist over the remainder of the year. Some of the issues we expect the market will continue to react to include inflation expectations and its impact on monetary policy, global trade and the midterm congressional elections. Stepping back from these headlines, we continue to focus on the strong fundamentals of a growing global economy, increasing corporate profits and a strengthening consumer. From a market perspective, investor demand for corporate issuance continued to be strong as new deals were largely oversubscribed and pricing remained attractive for issuers.

We remain comfortable with our overweight to EM debt, domestic high yield and investment-grade corporate bonds and our technical allocation to equity. Interest rates likely will continue to rise at a gradual pace and we are maintaining our duration shorter than the benchmark. We also feel that Treasury Inflation-Protected Securities will continue to present an attractive investment to hedge against an unexpected surge of inflation expectations. It is likely that the markets will experience increased volatility during 2018 and we expect the U.S. dollar to have a weakening bias over the course of the year.