Federated Government Income Securities, Inc. (F) FGOIX

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

Market Overview

In the fourth quarter of 2017, the Federal Reserve (Fed) took additional steps to normalize monetary policy by raising the federal funds rate and reducing its portfolio of investments. In December, the Federal Open Market Committee (FOMC) once again increased the fed funds rate based on continued economic strength and job creation. In October, the Fed commenced a reduction of reinvestment in government and mortgage-backed security (MBS) debt that slowly will reduce its balance sheet and, in concert with further upward rate adjustments, tighten policy. The combination of solid economic growth and passage of sweeping tax reform put investors in a buoyant mood, propelling spread sectors to strong gains relative to Treasury securities.

The final three months of 2017 produced the strongest quarterly job growth of the year as nonfarm payrolls increased by over 600,000 jobs and the unemployment rate fell to 4.1%, the lowest level since 2000. Although the inflation rate remained below the Fed’s 2% target, economic and employment trends provided sufficient confidence for the Fed to continue its measured pace of tightening. December’s 25 basis-point move increased the target range to 1.25-1.50%. Although global economic growth appears to be synchronized, central bank policy is diverging as the Fed moves to tighten monetary policy while European and Asian central banks continue quantitative easing (QE) and the accompanying massive balance sheet expansion. While QE continued to support global growth, U.S. tax policy passed in December 2017 reduced corporate and personal tax rates, which likely will increase profitability and, potentially, household spending. However, U.S. budget deficits and Treasury issuance are expected to increase.

Record levels of U.S. equity indexes and consumer confidence reflected a constructive economic environment. Demand for higher-yielding fixed-income investments remained firm as spread sectors posted strong excess returns. Investment-grade corporates, asset-backed securities (ABS) and commercial and residential MBS all outperformed similar duration Treasury securities. MBS, supported by declining volatility and range-bound interest rates, performed well despite the initiation of Fed tapering. Prepayment risk remained tame as the Mortgage Bankers Association’s Refinancing Index fell more than 10% during the reporting period.

Two- and 10-year U.S. Treasury yields increased 40 and 7 basis points to yield 1.88% and 2.41%, respectively.

Fund Performance

For the three months ended Dec. 31, 2017, Federated Government Income Securities, Inc. (F Shares) returned -0.07% based on NAV versus 0.11% 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’ net asset value (NAV) on Dec. 31, 2017, was $8.73.

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.

Range-bound interest rates, notably in longer-maturity Treasuries, and low volatility supported spread sector performance, which led to solid excess returns across a range of asset classes. The fund’s underweight to residential MBS was not beneficial as robust demand from mortgage real estate investment trusts (REITs) and banks boosted performance. Sector allocation acted as a drag on fund performance.

Portfolio effective duration was below that of the benchmark in a defensive strategy designed to reduce the effect of rising interest rates. Because market yields did in fact increase during the period, interest-rate strategy made a positive contribution.

Security selection proved beneficial, notably in conventional (Fannie Mae and Freddie Mac MBS) mortgage holdings.

Positioning and Strategy

With tight mortgage-to-Treasury spreads and low volatility, MBS valuations appear to be on the richer side of fair value. Therefore, the fund is underweighted to government MBS, favoring a mix of commercial and non-agency residential mortgages, as well as ABS. Within the agency MBS allocation, we favor conventional mortgages over their Ginnie Mae counterparts. The government allocation was 91% at quarter-end.

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 continues on a path of tightening policy.