Federated Short-Intermediate Total Return Bond Fund (A) FGCAX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Short-Term Bond
As of 09-30-2018

Highlights

  • The Federal Reserve (Fed) sees strong economic growth and low inflation, leading to further federal funds rate increases
  • Front-end Treasury yields continued to rise in response to the Fed’s rate hikes
  • The fund remains in a short duration posture but has reduced investment-grade overweight, while maintaining allocations to other spread sectors

Looking Back

The litany of geopolitical risk was not enough to derail the U.S. economy or markets in the third quarter. Increasingly harsh trade rhetoric, the imposition of sanctions on Chinese imports, uncertainty in countries such as Turkey and Argentina, as well as ongoing instability in Italy and the on-again, off-again Brexit talks reared their heads in August. But markets were able to shake these off and rally in July and September, and for the quarter as a whole. Renewed U.S. sanctions on Iran moved forward, raising the prospect of crude oil supply disruption, higher prices and possibly inflation as well. The real story, however, was the continued strong performance of the U.S. economy, which Fed Chairman Jerome Powell called extraordinary. The labor market continues to strengthen, as average hourly earnings have risen 2.9% over the last year, monthly employment gains have averaged 207,000 in 2018, and weekly jobless claims have fallen to 50-year lows. Reflecting this growth, surveys of consumer confidence reached highs not seen since 2000 and have contributed to steady gains in retail spending. Since consumer spending accounts for nearly 70% of U.S. gross domestic product, a confident consumer implies solid economic growth, especially important so near the all-important Christmas shopping season. In its September meeting statement, the Fed cited the strengthening labor market and strong rate of economic activity as reasons to continue raising the federal funds rate. The Fed sees continued strong, but slowing, growth in 2019, with unemployment falling to 3.5%, as well as higher, but well-behaved, inflation.

During the quarter, Treasury yields rose across the yield curve, again driven by expectations for Fed activity at the front end. The yield curve bear-flattened, as 2-year Treasury yields rose from 2.53% to 2.82%, and 30-year yields rose from 2.99% to 3.23%. Equities, high yield and emerging market (EM) debt outperformed other assets in the quarter, while all major fixed-income sectors outperformed comparable-duration Treasuries. Treasury Inflation-Protected Securities (TIPS) underperformed nominal Treasuries, as crude oil and gasoline prices finished slightly lower in the quarter. Gold, copper and aluminum prices fell during the quarter, while most agricultural commodities gained. The U.S. dollar edged slightly higher against a basket of major currencies and averaged 1.5% higher than in the third quarter of 2017.

Performance

Federated Short Intermediate Total Return Bond Fund Institutional Shares returned 0.48% at net asset value for the third quarter of 2018, while the fund’s benchmark, the Bloomberg Barclays 1-5 year Government Credit Index, had a total return of 0.26%. 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 benchmark index.

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

  • EM, high yield and bank loan exposure
  • Underweight interest-rate exposure relative to the benchmark
  • Outperformance in consumer non-cyclical, energy and capital goods holdings
  • Use of financial futures to achieve duration target

Performance Detractors

  • Underperformance in technology and transportation holdings
  • Allocation to TIPS

How We Are Positioned

Fed Chairman Jerome Powell has described the performance of the U.S. economy as extraordinary. At its September meeting, the Fed forecast continued strong growth for the U.S., which would justify further federal funds target rate increases into 2019. High consumer confidence provides the necessary backbone for continued economic strength, which may face headwinds from ongoing geopolitical and trade issues.

In keeping with Federated’s Alpha Pod recommendations, the fund is short its benchmark duration and has reduced its overweight to investment-grade corporate bonds, while maintaining allocations to high yield, EM and mortgage-backed securities.