Federated Government Income Securities, Inc. (F) FGOIX

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

Looking Back

In the first quarter of 2018, 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 and the Federal Open Market Committee raised the federal funds rate 25 basis points to a range of 1.50-1.75%. 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 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 rates 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.

Performance

For the three months ended March 31, 2018, Federated Government Income Securities, Inc. (F Shares) returned -1.11% based on net asset value (NAV) versus -1.17% for the unmanaged Blended Index comprised of 60% Bloomberg Barclays US Mortgage Backed Securities Index and 40% Bloomberg Barclays US Government Bond Index. The F Shares’ NAV on March 31, 2018, was $8.59.

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 1% sales charge or 1% contingent deferred sales charge for Class F Shares. If included, it would reduce the performance quoted.

Click the Performance tab for standard fund performance.

Non-Treasury sectors posted negative excess returns during the period as slack demand resulted in wider yield spreads to Treasuries. Commercial and residential MBS were among the sectors that experienced spread widening, and the fund’s sector allocation acted as a drag on 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 securities including commercial and residential MBS, agency debt and Treasuries. Government MBS are complemented with holdings of non-agency residential MBS and ABS. Higher interest rates reduced MBS 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.