As of 09-30-2017

Market Overview

Introduction to the third quarter of-2017

In the third quarter of 2017, neither hurricanes, war games, nor monetary policy change could upend the relative calm and low volatility that resonated throughout most developed global markets. For much of the reporting period, investors were focused on the growing tension between the U.S. and North Korea.  Geopolitical risk increased as the leaders of the two countries periodically exchanged threats, with the typical haven assets, such as gold and U.S. Treasuries, benefitting from the risk-off bias.  Ironically, as a renowned haven currency, the U.S. dollar actually weakened further during the third quarter; a tell-tale sign perhaps of global opinion.  During the reporting period, the U.S. Trade Weighted Broad Dollar Index was down -1.68%.

Incredibly, despite escalating geopolitical risks, overall risk premiums remained particularly subdued and orderly in equity, bond and currency markets. With the exception of a brief episode in August, equity volatility (as measured by the CBOE Volatility Index (VIX) concluded the reporting period at multi-year lows.  The MSCI World Index’s 4.39% return in the third quarter was emblematic of the general market stability and the improving trend in global growth.  Additionally, despite the hawkish rhetoric from a collection of central banks, developed market yields were modestly lower by the end of September as friction with North Korea intensified the demand for bonds.  Specifically, the Bloomberg Barclays Global Aggregate Index gained 1.76% the third quarter.


There were no surprises during the quarter from the Bank of Japan (BoJ), which maintained its ultra-loose monetary policy.  The bank kept interest rates at 0.00% and maintained its inflation target at 2.0%.  However, in light of persistently low inflation levels, the BoJ extended the timeline for the inflation target by one year, saying it expected inflation to reach 2% by fiscal year 2020.  The BoJ has kept in place its inflation timeframe of 2% since 2013.

In general, investors do not expect any withdrawal of stimulus until 2018, at the earliest, from the BoJ. With such a dovish mandate, one would think that the yen would have massively underperformed last quarter.  In fact, the Japanese yen lost a scant -0.11%, which spoke more about the ongoing U.S. dollar weakness.  The BOJ’s “curve control” policy continued to successfully subdue JGB volatility.  Benchmark Japanese government bonds were up 0.20% during the reporting period.

Commodity Linked Countries:

Undoubtedly, the stand out during the third quarter among the commodity-bloc economies (Canada, Australia, New Zealand) was Canada. Practically every economic data point during the reporting period registered robust results.  For instance, employment gains were above most estimates and the unemployment rate fell to its lowest levels since 2008.  Canadian retail sales printed above expectations, and even CPI posted modest increases.  Most notably, Canadian real GDP grew 4.5% annualized, and was well above the 3.7% consensus.  This solid GDP outcome reinforced the likelihood of another rate hike from the Bank of Canada (BoC).  As it turned out, the BoC ended up raising interest rates in September; they had effectively removed the emergency easing implemented in 2015 in response to falling oil prices.  No sooner had the BOC raised rates, did conjecture begin to surface that the central bank may actually begin to normalize monetary policy beyond the emergency oil stimulus.  This upbeat economic framework was mainly the reason why the Canadian dollar gained nearly 4% versus the U.S. dollar during the quarter.  Meanwhile, local Canadian benchmark bonds declined 1.95% during the three month period.

As widely expected, the Reserve Bank of Australia (RBA) kept its cash rate unchanged at 1.50%. The RBA’s statement also disclosed little in terms of new guidance and maintained the view that while the economy remains on a path of gradual recovery, downside risks would persist from a strong AUD and lack of wage growth, despite strong employment generation.  The RBA continues to flag downside risks to economic activity from a stronger currency, which it also expects to keep price pressures subdued.  Despite the conservative rhetoric, the Australian dollar still managed to gain 1.89% during the third quarter, while benchmark bonds lost -0.44%.

The Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate (OCR) at 1.75% throughout the period; matching expectations. The central bank did not signal any shift in the monetary policy stance, but it did take a strong position on the stronger exchange rate.  Their statement also maintained the view that monetary policy would remain accommodative for a considerable period.  This reserved outlook and direct currency reference contributed to the New Zealand dollar’s 1.69% loss. 

The Norwegian krone (NOK) was the best-performing currency in the G10, gaining 4.82% against the U.S. dollar. The NOK was supported by strong data, with inflation coming in at 1.5% on 10 August; well above market expectations.  This was reinforced with much higher-than-expected second quarter GDP, at 1.1% quarter-over-quarter, and retail sales also surprised to the upside.


Thus far, the U.K. has bucked the trend of subdued core inflation prevalent in the rest of the developed market complex. Though this divergence largely reflects pass-through from currency weakness related to Brexit, it nonetheless has created a difficult balancing act for the MPC (Monetary Policy Committee).  Ironically, the consumer inflation results alleviated some of the pressure on the central bank.  Headline inflation delivered a large downside surprise in July, falling from 2.9% one year ago to 2.6%.

In September, the drop in inflation took an abrupt turn. U.K. inflation data was released with CPI rising back to 2.9% year-over-year, which was not only above consensus, but materially beyond the central bank’s threshold. Soon after, the BoE (Bank of England) left rates unchanged, but shifted to a more hawkish bias, indicating that monetary tightening was likely to occur ‘over the coming months’.  Additionally, The BoE Governor, Mark Carney, cited that “the chance of a hike had definitely increased.”  This communiqué alone incited a British pound (GBP) rally which at its peak reached nearly +6% against the U.S. dollar.  By quarter end, the GBP was up 2.89% versus the U.S. dollar and local benchmark U.K. bonds only lost -0.36%.


The European Central Bank (ECB) left monetary policy rates unaltered during the third quarter, but was confident on the ongoing economic recovery. In a relatively balanced press conference, the ECB highlighted that the dataflow, particularly surveys, continued to point to solid, broad-based growth.  However, the central bank was fairly dovish when it came to inflation.  ECB President Mario Draghi stated that by fall of 2017, the Governing Council would reassess the monetary policy parameters given the improvement in macroeconomic conditions in the euro area.  Lastly, the ECB entirely dismissed the subject of excessive euro appreciation this year, which ironically sent the currency reeling even higher.  Year to date, the euro is one of the top-performing G20 currencies, and gained 3.40% in the third quarter alone.

Strong eurozone data during the reporting period surprised to the upside on multiple economic fronts. Manufacturing, composite PMIs and consumer confidence all registered upside surprises.  Notwithstanding the strong economic releases, the global demand for haven assets piloted the positive 0.48% return from local German bonds.  Even peripheral benchmark bonds managed well, with key local bonds in Italy returning 0.80% during the third quarter.

Fund Performance

During the reporting period, Federated Global Total Return Bond Fund had a total return (Class I Shares at NAV) of 1.43% in comparison to its benchmark, the Bloomberg Barclays Global Aggregate Index (LEGATRUU), which returned 1.76%. 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.

An underweight allocation to Japanese government bonds and the yen bettered performance relative to the Bloomberg Barclays Global Aggregate Index (LEGATRUU). However, an underweight allocation to both the New Zealand and Canadian dollars detracted from overall fund performance relative to the LEGATRUU Index.  Finally, overall portfolio duration reduced fund performance relative to the LEGATRUU Index (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).

Current Strategy

The “new normal” macro narrative in the months to come will very likely be just that, “monetary normalization.” A host of developed central banks appear keen on dipping their toes in a new body of water and begin the process of stimulus withdrawal that has become a hallmark since the financial crisis of 2008.  This new monetary endeavor will be partly systematic, and as the central bankers themselves attest, partly experimental.  Fund management is highly attuned to this global monetary inflection point and is positioning portfolio risk accordingly. 

At face value, the broader market backdrop still appears favorable for emerging-market assets. Global growth is steadily improving and downside risks to inflation seem to have dissipated materially.  At the same time, the possibility for heightened inflation and rapid monetary tightening appears immaterial.  This, on paper, leaves emerging-market risk in the sweet spot.  However, portfolios do not live on paper; they reside in risk-adjusted returns.  Fund management believes that the current emerging-market space has grown overcrowded and beginning to demand perfection to sustain current valuations.  Consequently, fund management has reduced its allocation to local emerging-market exposure for the time being.

Year to date, the euro is one of the best-performing G20 currencies. It is estimated that every 10% appreciation in the euro detracts 0.5% from inflation; an issue the ECB will invariably be forced to address.  To date, U.S. dollar weakness has surpassed what most technical and fundamental valuation estimates would designate.  There is a substantial political risk premium currently being priced into the U.S. dollar; a vote of confidence (or lack of) that is difficult to quantify.  Fund management continues to believe that U.S. monetary policy is completely discounted in the U.S. dollar’s valuation and should play a diminutive role in defining its path.  In contrast, U.S. fiscal initiatives are likely to be the key arbiter in deciding the dollar’s future.

Key Investment Team