As of 06-30-2018


  • Market sentiment being driven by geopolitical and trade concerns
  • Federal Reserve (Fed) sees further rate increases with solid fundamental economic backdrop
  • Overweight position to high-yield asset class a positive contributor, while overweight position to BBB category within investment-grade asset class was a negative contributor

Looking Back

After peaking at 3.11% in mid-May, the U.S. 10-year Treasury yield retreated to end the quarter modestly above where it started. Markets grew increasingly cautious during the quarter as optimism from the passage of U.S. corporate tax cuts and first-quarter corporate earnings reports faded into worry about geopolitical issues such as Iran, Italy and North Korea, as well as growing trade tensions. President Trump met with North Korean leader Kim Jong-un, pronouncing an end to the nuclear tension on the Korean peninsula. Italy was able to form a government, but only through an odd coalition of parties, which relieved some eurozone concern. U.S. pressure on Iran intensified during the quarter.

Perhaps larger than these issues was the growing chorus from Washington against friend and foe alike over “fair” trade. President Trump has indicated he is willing to slap tariffs on foreign goods. Is this a negotiating ploy? It is unclear, but the near-term result has been increased worry manifested in lower Treasury yields. What is clearer is that the Fed views the U.S. economy as being in great shape, with solid growth and a strong labor market. The Fed raised its federal funds target rate a second time this year at its June meeting, and indicated in its Summary of Economic Projections that it sees two more hikes in 2018 and likely three more in 2019 on continuing solid economic growth with low inflation.

During the quarter, Treasury yields rose, driven higher by Fed actions at the very front end. The yield curve bear-flattened as 2-year Treasury yields rose from 2.27% to 2.53% while 30-year yields ended only slightly higher at 2.99%. Equities and high-yield debt outperformed Treasuries, while investment-grade (IG) and emerging-market debt underperformed.


Federated Bond Fund Institutional Shares returned -0.51% for the three months ended June 30, 2018. That compares with the Bloomberg Barclays U.S. Credit Index return of -0.88% and the Bloomberg Barclays U.S. High Yield 2% Issuer Capped Index return of 1.03%. The blended benchmark, consisting of 75% of the Bloomberg Barclays U.S. Credit Index and 25% of the Bloomberg Barclays U.S. High Yield 2% Issuer Capped Index, returned -0.40%. The fund’s total return for the period also reflected actual cash flows, transaction costs and other expenses that were not reflected in the return of the blended benchmark.

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 the Performance tab for standard fund performance.

Click on the Portfolio Characteristics tab for information on quality ratings.

Performance Contributors

  • Short duration relative to blended benchmark in a general rising-rate environment
  • Overweight to high-yield asset class
  • Positive security selection in the banking, consumer and electric utilities sectors
  • Specific issuers held by the portfolio that outperformed the blended benchmark included: American Tire Distributors, Petroleos Mexicanos, Pacific Gas & Electric and Bank of America

Performance Detractors

  • Down-in-quality bias within IG asset class
  • Security selection in the communications and energy sectors
  • Specific issuers held by the portfolio that underperformed the blended benchmark included: Valmont Industries, Frontier Communications, Celgene Corp. and Intelsat.

How We Are Positioned

Macroeconomic fundamentals continue to point to solid economic growth, both domestically and around the world. Rising employment and strong consumer confidence undergird the U.S. economy. Potential uncertainty arises from policy and personnel changes in Washington, rising trade tensions, as well as further Fed actions under its new chairman.

Our outlook is for economic fundamentals to continue to provide the opportunity for further spread tightening. In keeping with Federated’s alpha pod recommendations, the fund is short its benchmark duration, with an overweight allocation to the high-yield asset class. The portfolio also continues with a down-in-quality positioning within the IG asset class. The portfolio remains committed to adjust the overall sector positioning in response to changes in valuation and credit quality.