Federated Government Ultrashort Duration Fund (IS) FGUSX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Ultrashort Bond
As of 12-31-2017

Market Overview

The fourth quarter was characterized by a notable shift in expectations regarding near- and intermediate-term monetary policy action by the U.S. Federal Reserve (Fed). While the tapering of the Fed’s balance sheet kicked off in October without any market disruption, stronger economic data and potential signs of inflation furthered the backup in yields on securities at the front end of the yield curve that began in early September. Anticipation of rate hikes at the December Federal Open Market Committee (FOMC) meeting and beyond increased, and the Fed confirmed market expectations in December by raising the fed funds target range from 1-1.25% to 1.25-1.50%. Movements in the yield on the 2-year Treasury reflected the shifting market sentiment and rose in anticipation of the Fed action. Beginning the quarter at 1.49%, the yield rose steadily over the period to end the quarter and year at 1.89%.

Fund Performance

The fund slightly underperformed its benchmark, the BofA Merrill Lynch 6-Month Treasury Bill Index, with a return of 0.20% (Institutional Shares) over the fourth quarter versus the index at 0.28%. The NAV for the fund (Institutional Shares) dropped from $9.89 to $9.88 over the quarter. During the quarter, spreads on floating-rate CMOs were stable, while prices on some adjustable-rate mortgages (ARMs) and fixed-rate CMOs declined somewhat due to rising interest rates at the short end of the yield curve. These price declines were somewhat offset by the higher income generated by the ARMs and fixed-rate CMOs but the income was insufficient to fully offset the price losses. For the calendar year ended Dec. 31, 2017, the fund outperformed its benchmark with a return of 1.06% (Institutional Shares at NAV) versus the index at 0.95%.

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 on the Performance tab for standard fund performance.

Positioning and Strategy

As of Dec. 31, 2017, 48% of the portfolio was invested in agency mortgage-backed securities (MBS), up slightly from the previous quarter-end. The fund invests primarily in two types of mortgage securities: hybrid-ARM pass-throughs and floating-rate CMOs. The rest of the portfolio remained invested in traditional government money market securities, including repurchase agreements collateralized by Treasury and government agencies. This allocation helped to enhance the liquidity and to reduce the price volatility of the fund, mitigating price declines in the MBS sector.