As of 12-31-2017


  • Accelerating global economic growth created strong momentum in risk assets, including equity, emerging market (EM), high yield and investment-grade corporate bonds
  • The yield curve continued to flatten aggressively on the Fed’s continued withdrawal of accommodation despite low market expectations for future inflation
  • After a brief respite during the third quarter, the U.S. dollar resumed its trend of depreciation against most currencies

Looking Back

The synchronized global economic expansion continued to accelerate in the final three months of 2017 on gains in manufacturing output, jobs and corporate profits. December’s passage of a tax-reform package including cuts for corporations and individuals further bolstered business and consumer confidence. These positives were reflected in the financial markets as most asset classes including stocks, corporate debt and commodities rallied strongly. While global inflation measures have moved up slightly, they still remain below what most central banks have communicated as being their longer-term target rate. This has helped riskier assets as markets perceived any future tightening of monetary policy as being somewhat benign, abetting low interest rates, elevated valuations for equities and credit and record lows in market volatility.

Fund Performance

Federated Strategic Income Fund Institutional Shares had a total return at net asset value (NAV) of 0.68%, slightly underperforming its blended benchmark (35% Bloomberg Barclays U.S. Mortgage-Backed Securities Index/40% Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index/25% Bloomberg Barclays Emerging Markets USD Aggregate Index) with a return of 0.70% during the quarter. The fund’s return significantly outperformed the Bloomberg Barclays Aggregate Bond Index, a commonly used barometer of performance for the broad high-quality bond market, which returned 0.39% during the quarter.

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

  • Overweight to domestic high yield and investment-grade corporate debt
  • EM exposure, which was moved from neutral to overweight at the end of November
  • Portfolio duration maintained shorter than benchmark duration
  • Strong security selection within EM allocation, particularly due to an underweight in Venezuela
  • Currency positioning for a modest weakening of the U.S. dollar and declining volatility

Performance Detractors

  • Slight negative from security selection within the high-yield allocation relative to the strong performing high-yield market
  • Positioning at the front-end of the yield curve detracted slightly as yields of shorter-maturity bonds increased more than longer-maturity bonds

How We Are Positioned

We begin 2018 with a very bright forward-looking economic picture tempered by very high valuations for most asset classes. With market volatility at historic lows along with elevated asset prices, one might say the markets are priced for perfection. Given these circumstances, we look for issues that may disrupt the current consensus outlook. Among the risks, we would suggest that the inflation that has been missing for several years begins to reemerge. In that instance, we feel that central banks may begin to speed up their path of withdrawing monetary accommodation more rapidly than has been previously communicated. While a perceived shift in monetary policy may cause temporary market volatility, we do not feel there will be a policy mistake that would ultimately derail the current expansionary trends over the intermediate term.

As we enter the year, we remain comfortable with our overweight to EM debt, domestic high yield and investment-grade corporate bonds and our technical allocation to equity. Interest rates likely will continue to rise at a gradual pace and we are maintaining our duration shorter than the benchmark. We also feel that Treasury Inflation-Protected Securities (TIPS) currently present an attractive investment to hedge against an unexpected surge and inflation expectations. It is likely that the markets will experience increased volatility during 2018 and we expect the U.S. dollar to have a weakening bias over the course of the year.