Federated Municipal Bond Fund, Inc. (A) LMSFX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Muni National
As of 12-31-2017

Muni Bond Market Q4 2017

Yields on intermediate- and short-term Treasury securities increased, while yields on long-term Treasury securities declined during the fourth quarter of 2017 amid ongoing moderate U.S. economic expansion, incremental tightening of monetary policy by the Federal Reserve, continued modest inflation and enactment of federal tax cuts in December. Two- and 10-year Treasury yields increased by 40 and 7 basis points, respectively, while the 30-year Treasury yield decreased by 12 basis points. Municipal bond yields followed a similar pattern over the quarter, after some bouts of volatility related to a record surge in municipal issuance late in the year ahead of the effective date for tax-policy changes. The surge in supply was met with strong demand, thus allowing yields on intermediate- and long-term municipal bonds to decline more than was observed in the Treasury market. Municipal Market Data (MMD) 2-year AAA tax-exempt yields increased 56 basis points, while the 10- and 30-year AAA tax-exempt yields decreased by 2 and 30 basis points, respectively.

The S&P Municipal Bond Index posted a return of 0.64%. The 3-year component of the index returned -0.92%, while 10-year component returned 0.60% and the portion of the index maturing in 22 years and longer returned 2.14%. The AAA/Aaa component of the index returned 0.40%, the A-rated component returned 0.87% and the BBB-rated component returned 1.55%. The S&P Intermediate Municipal Bond Index posted a return of 0.11%. The S&P High Yield Municipal Bond Index returned 0.96%, but rose to 2.00% when excluding sharply underperforming Puerto Rico bonds.

Performance

During the fourth quarter of 2017, a positive contribution was made to performance by the fund’s holdings in Tobacco Settlement debt, Hospital and Transportation financings, which performed well during the quarter. However, the fund’s exposure in Public Power financings and Special Tax debt had a negative impact on performance.

Credit spreads narrowed selectively as risk-taking by investors continued, with the narrowing of credit spreads to a greater extent in A- and BBB-rated (or comparable quality) debt. The fund’s overweight, relative to the index, in A- and BBB-rated debt during the quarter positively impacted the fund’s performance as the yield on A- and BBB-rated debt decreased to a greater extent than for other investment-grade securities. The fund’s overweight in non-investment-grade debt was a positive contributor to performance as this sector of the market continued to provide incremental yield and positive price performance.

Performance quoted represents past performance which is no guarantee of future results. 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.

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Strategy

During the fourth quarter of 2017, the fund’s manager used the following primary investment strategies. The fund manager increased holdings of lower-rated, tax-exempt, investment-grade and non-investment-grade municipal debt relative to the S&P Investment Grade Municipal Bond Index, the fund’s broad-based securities market index, to seek to take advantage of the additional yield provided and the expectation of tighter or, at worse, stable credit-spreads. The purchase of Essential Service Revenue bonds, such as Higher Education, Public Power and Senior Care bonds, were emphasized due to their potential to undergo credit improvement in the coming months and their attractive valuations compared to alternative market sectors. Portfolio duration was targeted at 95% of the duration of the index.