Federated Global Total Return Bond Fund (IS) FGTBX

Share Classes Product Type Asset Class Category
Mutual Fund Intl/Global Global
As of 03-31-2018

Market Overview

After two years of virtually parabolic appreciation, global equity total returns endured losses in the first quarter of 2018 as U.S. trade protectionist policies began to surface.  Having laid dormant since 2015, equity volatility premiums surged in response to the slump in stocks.  As we have remarked in prior correspondences, low volatility can be as equally corrosive to asset valuations as when they are elevated.  Extended periods of low volatility is effectively the birthplace where imbalances, bubbles and biases grow stronger.  Contrary to media propaganda, a market that never corrects is not “Goldilocks,” but one that is more likely to turn into a Pandora’s box.

Arguably, the world’s leading central banks have lulled investors into a synthetically engineered sense of bliss by saturating financial markets with liquidity after the 2008 financial crisis.  As 10 years of global quantitative easing draws to a close, it is only natural for volatility to rise.  Additionally, the volatility disruption in equities barely permeated either the bond or currency option markets; highly insinuating that equity risk premiums were simply normalizing after an extensive hibernation.  Consequently, we view the latest run up in volatility as a healthy recalibration process for global risk premiums and not a symptom of large financial peril.

The downturn in global equity bourses in the first quarter of 2018 revitalized demand for the harbor characteristics of global bonds; particularly government-issued debt.  Consequently, the flagship bond index, the Bloomberg Barclays Global Bond Aggregate Index was up on the quarter; owing its 1.36% total return to both haven flows and U.S. dollar weakness.  In contrast, the MSCI World Index (MXWO) returned -1.74%.

The dollar declined broadly through the course of last year, as economic growth began to expand outside of the United States.  The U.S. dollar’s (USD) drop accelerated in the first few weeks of 2018, but came to a standstill by February.  By period end, investors had begun to contemplate whether the greenback’s losses had surpassed fundamentals or whether the decline was still in its early stages.  Despite this mixed outlook, the USD still suffered losses against the bulk of its G20 peers.  For instance, the Mexican peso garnished an 8.10% return in the first quarter alone.  Similarly, the Japanese yen benefited from the rise in volatility and gained 6% against the USD.  In a wider context, the U.S. Trade Weighted Broad Dollar Index (USTWBROA) was returned ‑1.26% in the first quarter of 2018. 

Japan:

Benefitting from its haven properties, the Japanese yen was the premier G10 performer during the reporting period.  Generally speaking, the yen’s strong performance was linked to the sell-off in equities, but there were other local factors that also played a role in its appreciation.  For instance, CPI registered higher-than-expected gains and overall GDP was in accord with most estimates.  The Bank of Japan’s (BoJ) “curve control policy” did a fantastic job at curtailing interest-rate volatility by keeping 10-year yields constrained to a 0.10% band.

In February, Japanese Prime Minister Shinzo Abe nominated Haruhiko Kuroda for a second term as governor of the BoJ.  This decision preserved the status quo established during Kuroda’s first term, which was to reflate the Japanese economy by any means necessary.  Ironically, the nomination failed to weaken the yen as the currency was consumed with haven buying spawned by the instability in the equity markets.  Specifically, the Japanese yen rallied 6% in the first quarter of 2018, while benchmark Japanese bonds gained 0.46% during the same period.

Commodity Linked Countries:

Despite the ongoing demand for raw commodities, both bond and currency returns of the commodity-bloc economies (Canada, Australia, New Zealand) still managed to underperform many of their global counterparts.  Most rules have exceptions, and in this particular three month period, Norway was that exception.  The Norwegian krone (NOK) was the second-best performing currency in the G10 space; a healthy 4.60% return during the quarter.  Buttressed by higher oil prices and strong global growth, manufacturing expanded considerably in Norway.  Additionally, inflation jumped more than estimated and was above the central bank’s official threshold.  Lastly, Norwegian consumer prices also rose 2.2 percent from a year earlier, the highest level since April 2017. 

Lasting wage weakness continued to pressure the Australian dollar, which was one of the few currencies to lose ground against the USD in the quarter (-1.66%).  In contrast, local Australian benchmark bonds returned 1.10% during the quarter.  In New Zealand, the central bank (RBNZ) kept benchmark interest rates steady at 1.75%, but followed up with a conservative tone.  Specifically, the RBNZ cut its growth projections and delayed its inflation goal timeline by nearly two years.  The RBNZ also stressed the headwinds created by recent New Zealand dollar appreciation. 

U.K.:

In the U.K., a number of factors conspired to push sterling to the highest level since the country’s decision to leave the European Union.  Specifically, GDP expanded on the quarter and the labor market strengthened as well.  Constructive progress on ‘Brexit’ further revitalized the British pound’s valuation, however, sterling’s rapid ascent weighed on British stocks, given that a wide array of U.K. companies are heavily reliant on revenues generated from abroad.

The Bank of England left its key rate unaltered at 0.5% in March, as was universally expected.  Guidance from the central bank depicted yet another increase in the second half of 2018.  Specifically, the BoE cited:  “the best collective judgment is that of an ongoing tightening of monetary policy over the forecast period would be appropriate.”  Ironically, globalized equity weakness overshadowed the BoE’s hawkish posture, and U.K. yields receded aggressively in March.  Specifically, benchmark U.K. bonds were up marginally on the period; a gain of 0.26%.  Meanwhile, the British pound did react to the MPC (Monetary Policy Committee) minutes and gained 3.70% during the three month reporting period.

Europe:

Despite the uncertainties surrounding the Italian elections and the German coalition, politics actually played a very minor role in European market developments the first quarter of 2018.  From a nominal perspective, economic activity remained very healthy in Europe, but in a relative sense some economic figures began to waiver.  For instance, PMI came in below consensus, dropping by a sharper 1.8 points to 55.3.  At face value, this was still a high level nonetheless.  Output growth decelerated in both manufacturing and services, new order inflows waned, job creation lost momentum and input costs rose sharply.  The decline was particularly pronounced in Germany, while it turned out to be more moderate in France.  Overall, the composite PMI is still pointing to a solid expansion, but its second consecutive drop does warrant some caution.

The ECB Governing Council unanimously decided to drop any reference from its forward guidance to the possibility of increasing quantitative easing (QE).  However, it did not change its cautious outlook on inflation, and was very clear to stress more patience and persistence.  However, the ECB did convey that the euro-area economy is recovering robustly, but upside pressure to consumer prices still remained uncomfortably tepid.  This ‘patience for longer’ posture helped to re-establish demand for both core and peripheral European bonds.  Benchmark German bunds gained 0.22% in the first quarter, while peripheral counterparts like Spain and Italy rose 3.67% and 2.57%, respectively.  The euro was largely sidelined for the month, but still managed to gain 2.70% against the USD in the first quarter of 2018.

Fund Performance

During the first quarter of 2018, Federated Global Total Return Bond Fund had a total return (Institutional Shares at NAV) of 1.00% in comparison to its benchmark, the Bloomberg Barclays Global Aggregate Index (LEGATRUU), which returned 1.37%.  The fund’s total return reflected actual cash flows, transaction costs, and other expenses that were not reflected in the total return of the index. 

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 Portfolio Characteristics for information on quality ratings.

Overall, the fund’s absolute positive total return was largely attributable to foreign currency appreciation and haven demand for global bonds.  An overweight allocation to local Brazilian bonds detracted from performance; weakness in the Brazilian currency was the main factor.  In contrast, an overweight allocation to both Mexican bonds and the peso materially improved performance relative to the fund’s index (LEGATRUU).  Specifically, the Mexican peso was the best-performing currency in the G20 universe.  Yield-curve exposure diminished total return, while duration management was the largest overall contributor to performance relative to the LEGATRUU Index.


Key Investment Team