Federated Fund for U.S. Government Securities (B) FUSBX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Intermediate Bond
As of 03-31-2018

Market Overview

The Federal Reserve (Fed) continued tightening monetary policy as the U.S. economy displayed signs of continued strength and expansion. Jerome Powell assumed chairmanship of the Fed’s Board of Governors in the first quarter of 2018 and raised the federal funds rate 25 basis points to a range of 1.50-1.75% in his first meeting as Fed Chair. The Fed cited a stronger outlook in recent months supported by job creation and a declining unemployment rate. Market yields increased in response to economic strength, signs of inflation and expectations for tighter monetary policy.

The U.S. labor market remained robust. Over 600,000 jobs were created during the quarter. In a sign of strength, the U.S. labor force participation rate increased while initial jobless claims fell to the lowest level since the early 1970s, a time when the domestic labor force was markedly smaller. A robust job market supported consumer confidence and spending as well as home sales. Solid economic data, historically low unemployment, tighter monetary policy and trade-related concerns translated into higher market yields and underperformance of spread sectors.

Treasury yields increased across the maturity spectrum as the Fed’s two-pronged strategy of higher federal funds and lower quantitative easing (QE) reinvestments reduced demand for government debt. Higher market yields led to underperformance for a wide variety of fixed-income classes as investment-grade and high-yield debt, commercial and residential mortgage-backed securities (MBS) and asset-backed securities (ABS) posted negative excess returns.

Higher interest rates, lower levels of refinance activity and high market volatility made for a challenging market for mortgage securities. Rising interest rates served to lengthen mortgage security average lives as refinance opportunities diminished. As a result, MBS effective durations extended in the rising rate environment. Simultaneously, the Fed curtailed security purchases in accordance with its schedule to wind down the QE program. Government-issued MBS experienced spread widening during the period, leading to sector underperformance.

Two- and 10-year U.S. Treasury yields increased 38 and 33 basis points to yield 2.27% and 2.74%, respectively.

Fund Performance

For the three months ended March 31, 2018, Federated Fund for U.S. Government Securities (A Shares) returned -1.21% based on NAV versus -1.19% for the unmanaged Bloomberg Barclays US Mortgage Backed Securities Index. The A Shares’ NAV on March 31, 2018, was $7.21.

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. Performance does not reflect the maximum 4.5% sales charge for Class A Shares. If included, it would reduce the performance quoted.

Click the Performance tab for standard fund performance.

Within the government-issued mortgage universe, Ginnie Mae MBS lagged their conventional counterparts from Fannie Mae and Freddie Mac. The fund’s substantial underweight to Ginnie Mae mortgage securities proved beneficial as the sector underperformed. Sector allocation made a positive contribution to fund performance.

Interest-rate sensitivity was below that of the benchmark, therefore, rising Treasury yields had a lower impact on the portfolio relative to the benchmark. Interest-rate strategy made a positive impact on fund performance.

Positioning and Strategy

At least 80% of portfolio assets are required to be invested in government securities. Portfolio composition reflects a greater than 92% allocation to government-issued mortgage securities. Government MBS are complemented with holdings of non-agency residential MBS and ABS. Higher interest rates have reduced refinance risk and price premiums for specified MBS over generic “cheapest to deliver” mortgages. Consequently, we are focused on finding relative value opportunities at lower prices via security selection.

Interest-rate sensitivity is below that of the benchmark reflecting a cautious view on interest rates based on the possibility that Treasury yields may increase in future months as the Fed tightens monetary policy.