Federated Government Ultrashort Duration Fund (R6) FGULX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Ultrashort Bond
As of 06-30-2018

Market Overview

The second quarter brought a moderation in net new Treasury bill supply as compared to the first quarter, as April tax receipts exceeded expectations. With continued strength in the U.S. economy and inflation readings approaching 2%, the Federal Reserve raised the federal funds target range at its June meeting, from 1.50-1.75% to 1.75-2%. The Fed painted an optimistic picture of the economy at that meeting, and the summary of economic projections reflected a median projection for two additional rate hikes in 2018. Reflecting the Fed’s action and outlook, the yield on the 2-year Treasury rose from 2.27% at the end of March to 2.53% at the end of June.

Fund Performance

The fund outperformed its benchmark, the BofA Merrill Lynch 6-Month Treasury Bill Index, with a return of 0.55% (Institutional Shares at net asset value, or NAV) over the second quarter versus the index at 0.48%. The NAV for the fund (Institutional Shares) increased from $9.88 to $9.89. Spreads on floating-rate collateralized mortgage obligations (CMOs) and adjustable-rate mortgages (ARMs) were relatively stable due to ongoing demand for short-duration assets, while the income offered on these holdings was attractive relative to yields available on traditional government money market securities.

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 June 30, 2018, 44% of the portfolio was invested in agency mortgage-backed securities (MBS), down somewhat from the previous quarter-end position of 52%. The fund invests primarily in two types of mortgage securities: hybrid-ARM pass-throughs and floating-rate CMOs. Because the majority of these securities are floating rate in nature, they benefited from the continued rise in rates on short-term securities due to the Fed’s monetary policy action. The rest of the portfolio remained invested in traditional government money market securities, including repurchase agreements collateralized by the 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. This position also helped to increase the responsiveness of the fund to changes in short-term interest rates.