Federated Global Total Return Bond Fund (IS) FGTBX

Share Classes Product Type Asset Class Category
Mutual Fund Intl/Global Global
As of 09-30-2018

Market Overview

The dog days of summer are typically reserved for family gatherings and quiet sunsets, but for global financial markets, the third quarter of 2018 was anything but typical.  Global investors had to digest a host of issues that spanned across a dizzying spectrum of topics.  To name just a few:  the U.S. introduced new sanctions against Iran, 200 billion dollars of Chinese imports became subject to tariffs, many emerging economies were stricken with election uncertainties, Turkey battled with hyper-inflation, Italy’s ruling coalition defied fiscal guidelines, the new NAFTA was ratified and the U.K. tussled back and forth on Brexit negotiations.  All this occurred while U.S. economic data was booming and drove both stocks and Treasury yields to new highs for the year.  Economic divergence between the United States and the rest of the world became the hallmark of the quarter.

From a global bond total return perspective, the uncertainty engendered by an array of economic and political uncertainties was not enough to offset the steady rise in global yields.  Consequently, the flagship Bloomberg Barclays Global Bond Aggregate Index was declined 0.92%. 

The U.S. dollar advanced further in the quarter, but its appreciation was much more muted than in prior reporting periods, particularly against the developed economies.  The story was starker for the emerging (EM) universe.  Macroeconomic and financial conditions turned more adverse for EM currencies.  U.S. interest rates increased across the curve, driven by steady Federal Reserve tightening and a recovery in underlying inflation.  This development coincided with a slowdown in China; a toxic mix for many EM countries.  Broadly speaking, the U.S. Trade Weighted Broad Dollar Index (USTWBROA) gained 1.30% in the quarter.  However, this modest return failed to adequately convey the outsized losses endured in some EM countries.  For example, during the reporting period, the Argentinian peso declined 30% and the Turkish lira depreciated 24%.

Japan:

After a difficult start to the year, the Japanese economy seems to have stabilized in the third quarter and inflation began to increase, be it at a fractional pace.  Japanese headline CPI rebounded to 1.3% year-over-year; breaking a streak of declines.  However, the core price gauge (ex. fresh food and energy) remained uncomfortably close to zero at 0.5%.  Overall, inflation data was underwhelming but did put an end to a string of worrisome decreases.

Early in the period, market attention seemed to capriciously fixate itself on the July 31 Bank of Japan meeting.  Absent of any substantiation, market participants became convinced that the Bank of Japan (BoJ) would alter their Yield Curve Control policy (YCC) in a meaningful manner.  With core inflation running near zero percent, this growing market outlook was confounding to say the least.  Leading up to the meeting, Japanese yields began to challenge the upper tolerance of the BoJ, and the yen began to strengthen on nothing more than chatter and inference.  As Japanese government bond yields rose, so did the borrowing costs of many other developed countries.  In the end, the central bank restored the economic realities by simply making cosmetic changes to its monetary policy.  However, the BoJ did assert that it would allow 10-year Japanese yields to rise to 0.20%; a tolerance increase of 0.10%.  Nonetheless, the BoJ was steadfast in keeping extraordinary low rates for “an extended period of time.”

The yen was the worst-performing G10 currency in the third quarter, as the rise in U.S. yields offered a strong incentive for investors to abandon the currency in favor of the higher-yielding USD.  Throughout the course of the reporting period, local benchmark Japanese bonds were declined 1.21%.

Commodity Linked Countries:

Tariffs, heightened volatility and a slowdown in China are not exactly the conditions that commodity-heavy economies fancy.  Additionally, many commodity-centric countries, like Australia, New Zealand, and Canada, are inherently higher beta in composition and more vulnerable to episodes of uncertainty and volatility.

NAFTA negotiations remained the main driver for both bonds and the currency in Canada.  The Bank of Canada increased its interest rate to 1.50% during the quarter, stressing that core measures of inflation remained anchored around 2%.  Additionally, both retail sales and GDP came in better than general consensus, but wage growth began to stall.  By the end of the period, a measure of confidence returned to the markets after American and Canadian representatives announced a trade deal to be known as the U.S. Mexico Canada Agreement (USMCA).  This declaration was almost singlehandedly responsible for the 1.74% gain that the Canadian dollar achieved over the U.S. dollar.  On the other hand, benchmark Canadian bonds declined 1.07% over the three-month period.

Both the currencies of Australia and New Zealand came under pressure as U.S.-China trade tensions escalated.  Also, both central banks left their policy rates unchanged, the RBA at 1.50% and the RBNZ at 1.75%, with no significant changes to their policy statements.  Economic data in each country was actually quite stable throughout the period, but discouraging global macro developments overshadowed an otherwise improved outlook.  Consequently, both currencies were among the worst performers in the G10 community.  During the reporting period, the Australian dollar lost 2.44%, while the New Zealand dollar depreciated by 2.20%.

U.K.:

Uncertainties surrounding the Brexit negotiations remained the overriding factor in British economic developments.  Ongoing negotiations between the U.K. and European Union on two main documents that will frame the U.K.’s exit in March 2019, was the main focus.  Resolution of the key outstanding issues in these documents is essential to the U.K. economy and the British pound.  Currently, the biggest question remains whether the May administration could retain the necessary political support to be able to put these agreements in place.  The scope of issues yet to be negotiated are boundless, yet the 2019 deadline creeps ever so near.

The Bank of England (BoE) delivered its well-anticipated 25 basis point interest rate rise in August.  On the economic front, GDP growth for the second quarter came in at 1.5% on an annualized basis, which was in line with expectations but a bit lower than the BoE’s forecasts.  During the reporting period, the British pound declined 1.33% while benchmark bonds also forfeited 1.85%.

Europe:

The euro ended the month little changed against the U.S. dollar as a more hawkish European Central Bank was offset by weaker-than-expected eurozone data and Italian budget disputes.  While inflation appears to be rising in Europe, growth has been slipping and trade tensions continued to dampen investor confidence.  Consequently, the European Central Bank is unlikely to deviate from its balanced outlook or change its gradual normalization schedule that it has already outlined.  Accordingly, and despite the recent rise in European yields, there is little incentive for borrowing costs in the core EU states to rise dramatically in the near term.

Midway through the quarter, markets became anxious about the new Italian government’s budget plans, which were scheduled to be released by the end of September and submitted to the European Union for approval on the 15th of October.  If Italy’s budget deviated from the objectives of the stability and growth pact, the European Commission could be forced to reactivate the excessive deficit procedure against Italy and the country’s credit rating could also be at risk.  In the final days of the reporting period, the mood quickly soured on reports that Italy’s budget decision would be delayed due to conflicting interests between the new populist coalition and the residing Finance Minister.  The final announcement of a 2.4% deficit was nearly three times what the Finance Minister had originally outlined.  The consequences weighed heavily on the euro and sky-rocketed 10-year Italian yields to 3.40%.  The budget news also incited a haven rally in German bunds and sent 10-year yields nearly 0.20% lower to 0.30%.  Overall, the euro lost -0.68% during the reporting period and benchmark German bonds were declined 0.79%, a modest comparison compared to the 0.87% loss that benchmark Italian bonds endured.

Fund Performance

During the reporting period, Federated Global Total Return Bond Fund had a total return (Institutional Shares at NAV) of -1.13% in comparison to its benchmark, the Bloomberg Barclays Global Aggregate Index (LEGATRUU), which returned -0.92%.  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 total return largely attributable to both foreign currency depreciation and global bond weakness.  An overweight allocation to short-dated local Mexican bonds improved performance; a material rally in the Mexican peso was the main factor.  In contrast, an investment in local Brazilian bonds detracted from performance.  Additionally, an overweight currency allocation in Norway improved performance relative to the fund’s index (LEGATRUU).  Yield curve exposure had no impact on return, while active duration management was an overall contributor to performance once again relative to the LEGATRUU Index.  The fund maintained a lower duration threshold than its index throughout the reporting period (duration is effectively the fund’s sensitivity to movements in interest rates; the lower the duration the less the net asset value of the fund will fluctuate due to changes in interest rates).


Key Investment Team