As of 09-30-2018


  • Solid fundamental economic backdrop has offset geopolitical and trade concerns
  • Federal Reserve (Fed) sees further rate increases with solid fundamental economic backdrop
  • Overweight positions to high-yield asset class and BBB-category within investment-grade (IG) asset class were positive contributors

Looking Back

The litany of geopolitical risk was not enough to derail the U.S. economy or markets in the third quarter. Increasingly harsh trade rhetoric, the imposition of sanctions on Chinese imports, uncertainty in countries such as Turkey and Argentina, as well as ongoing instability in Italy and the on-again, off-again Brexit talks reared their heads in August. But markets were able to shake these off and rally in July and September, and for the quarter as a whole. Renewed U.S. sanctions on Iran moved forward, raising the prospect of crude oil supply disruption, higher prices and possibly inflation as well. The real story, however, was the continued strong performance of the U.S. economy, which Fed Chairman Jerome Powell called extraordinary. The labor market continues to strengthen, as average hourly earnings have risen 2.9% over the last year, monthly employment gains have averaged 207,000 in 2018 and weekly jobless claims have fallen to 50-year lows. Reflecting this growth, surveys of consumer confidence reached highs not seen since 2000 and have contributed to steady gains in retail spending. Since consumer spending accounts for nearly 70% of U.S. gross domestic product (GDP), a confident consumer implies solid economic growth, especially important so near the all-important Christmas shopping season. In its September meeting statement, the Fed cited the strengthening labor market and strong rate of economic activity as reasons to continue raising the federal funds target rate. The Fed sees continued strong, but slowing, growth in 2019, with unemployment falling to 3.5%, as well as higher, but well-behaved, inflation.

During the quarter, Treasury yields rose across the yield curve, again driven by expectations for Fed activity at the front end. The yield curve bear-flattened, as 2-year Treasury yields rose from 2.53% to 2.82%, and 30-year yields rose from 2.99% to 3.23%. Equities, high yield and emerging-market debt outperformed other assets in the quarter, while all major fixed-income sectors outperformed comparable-duration Treasuries.


Federated Bond Fund Institutional Shares returned 1.16% at net asset value (NAV) for the three months ended Sept. 30, 2018. That compares with the Bloomberg Barclays U.S. Credit Index return of 0.89% and the Bloomberg Barclays U.S. High Yield 2% Issuer Capped Index return of 2.40%. 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 1.27%. 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 the fund’s top ten holdings and information on quality ratings.

Performance Contributors

  • Short duration relative to blended benchmark in general rising rate environment
  • Overweight to high-yield asset class and down-in-quality bias within IG asset class
  • Positive security selection in the consumer non-cyclical and technology sectors
  • Specific issuers held by the portfolio that outperformed the blended benchmark included: Kinder Morgan, Liberty Global, Mallinckrodt and Celgene Corp.

Performance Detractors

  • Overall security selection
  • Negative security selection in the basic industries and capital goods sectors
  • Specific issuers held by the portfolio that underperformed the blended benchmark included: Valmont Industries, General Electric, and Textron

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 rising trade tensions, as well as further Fed actions.

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.