As of 03-31-2018


  • January’s risk-on environment reversed with February’s volatility surge, while March was dominated by Washington and geopolitical issues
  • Federal Reserve (Fed) sees further steady rate increases, but also stronger economic growth and lower unemployment
  • Short duration position a positive contributor, while security selection a negative contributor

Looking Back

The first quarter of 2018 started with a very strong January, as equity indices pushed to record highs and yields rose, helped by recent fiscal policy changes in Washington. Despite continuing solid economic data, markets turned skittish in mid-February, as volatility trades were unwound. Without major follow-through, the weakness receded and markets rebounded on continuing strong corporate earnings. In March, new Fed Chair Jerome Powell reiterated his predecessor’s policy of steady rate increases, while an update to the Fed’s quarterly Summary of Economic Projections showed at least two further rate hikes in 2018 as well as higher economic growth with lower unemployment.

Overall, markets struggled during the quarter. According to Bloomberg Barclays data, U.S. Treasuries posted a negative total return, but shorter Treasury maturities outperformed longer ones, while Treasury Inflation-Protected Securities (TIPS) outperformed nominal Treasuries. High yield and emerging-market debt outperformed investment-grade credit, as their shorter duration and higher carry were able to offset more of the yield increase. Ten-year Treasury yields ended 2017 at 2.40%, rose to a high of 2.95% in mid-February, before retreating to close the quarter at 2.74%.


Federated Bond Fund Institutional Shares returned -2.05% for the first quarter of 2018. That compares with the Bloomberg Barclays U.S. Credit Index return of -2.13% and the Bloomberg Barclays U.S. High Yield 2% Issuer Capped Index return of -0.86%. The blended benchmark, consisting of 25% of the Bloomberg Barclays U.S. Credit Index and 75% of the Bloomberg Barclays U.S. High Yield 2% Issuer Capped Index, returned -1.81%.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.

Performance Contributors

  • Short duration relative to blended benchmark in a generally rising-rate environment
  • Overweight to high-yield asset class
  • Positive security selection in capital goods, insurance and technology sectors
  • Specific issuers held by the portfolio that outperformed the blended benchmark included: Morgan Stanley, Bank of America, Valero Energy and CVS Health Corp.

Performance Detractors

  • Down-in-quality bias within investment-grade asset class
  • Security selection in the communications, REITS and consumer cyclical sectors
  • Specific issuers held by the portfolio that underperformed the blended benchmark included: Nationwide Mutual, Ford Motor Co., Liberty Mutual and Celgene Corp.

Click the Portfolio Characteristics tab for information on quality ratings and the fund's top ten holdings.

How We Are Positioned

Following passage of dramatic fiscal changes in late 2017, 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, as well as further Fed actions under its new chairman.

Given the spread widening seen in first quarter, some value has been re-established in spread sectors. 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 investment-grade asset class. The portfolio remains committed to adjust the overall sector positioning in response to changes in valuation and credit quality.