Federated Short-Intermediate Duration Municipal Trust (IS) FSHIX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Muni National
As of 09-30-2018

Performance Highlights

  • The fund’s quarterly net performance beat the benchmark; 12-month trailing net returns exceeded benchmark
  • Cautious duration posture (1.4 years) remains warranted
  • Fund has high floating/variable-rate exposure (38% at quarter-end) that benefits from higher rates

Looking Back

In its June policy-setting meeting, the Federal Reserve (Fed) laid out a relatively straight path to a September rate hike, which came to pass with a quarter-point increase in the target range to 2-2.25%. But there was a slight bump, as President Trump publically criticized the central bank for raising rates because of their potential to stem economic growth. Fed Chair Jerome Powell addressed this by stating in September that the central bank does not consider political elements when setting policy. September’s rate hike was not the only policy tool the Fed implemented during the reporting period. It continued to expand its quantitative-tapering (QT) plan that allows maturing Treasuries and government agency securities to roll off its massive balance sheet. The resulting increase in supply in the marketplace nudged rates even higher, particularly as the amount of maturing securities not reinvested per quarter has grown from an initial $30 billion in the fourth quarter of 2017 to $120 billion in the reporting period.

On the macro level, the housing market continued to soften, as supply decreased and mortgage rates edged up. But most economic indicators were solid, if not robust: job growth, consumer confidence, retail sales, manufacturing and service activity, and capital expenditures all hit or were near cycle—and in some cases multi-decade—highs during the 3-month period. Gross domestic product accelerated even as inflation remained moderate and manageable. The quarter saw intensification of tariffs by the Trump administration on China, and responses in kind. But while edging ever closer to a full-blown trade war and facing opposition from select U.S. industries, the duties did not result in meaningful headwinds for the domestic economy. A trade deal with Mexico suggested that at the end of the day, a transactional Trump wants deals, not conflict. Although the trade skirmishes began to affect the global economy, greater impact was felt from U.S. dollar strength, particularly in emerging markets. But the most prominent troubled areas, such as Turkey, Argentina and Indonesia, faced idiosyncratic struggles, suggesting a contagion was not in the works.

Municipal bond yields increased with Treasury yields amid the continued strong U.S. economic expansion and further tightening of monetary policy by the Fed. Municipal Market Data (MMD) 2-, 10- and 30-year AAA tax-exempt yields increased by 33, 12 and 25 basis points, respectively. Yields on 2-, 10- and 30-year Treasury securities increased by 29, 20 and 22 basis points, respectively. During much of the quarter, losses in emerging markets and U.S. trade policy risks seemed to restrain Treasury yields from rising. Near the end of the quarter, these risks eased: emerging markets performance improved and the U.S. reached a new trade agreement with Canada and Mexico. This allowed generally strong U.S. economic data and the ongoing Fed policy normalization to drive U.S. bond yields higher.

The S&P Municipal Bond Index posted a loss of 0.14% for the quarter. The 3-year component of the index returned -0.02%; the 10-year component returned 0.10%; and the portion of the index maturing in 22 years and longer returned -0.51%. The AAA-rated and A-rated components of the index were down 0.30% and 0.13%, respectively, while the BBB-rated component returned 0.24%. The S&P 1-5 Year National AMT-Free Municipal Bond Index (SP15MBI), the fund’s prospectus benchmark, posted a return of -0.03%.

Performance

During the third quarter of 2018, the fund had total returns of 0.15% for the Institutional Shares (IS), 0.09% for the Service Shares (SS) and 0.03% for the Class (A) Shares at net asset value (NAV). For the institutional shares, the fund’s AMT-free, tax-exempt income was offset by 3 cents of NAV depreciation as the NAV ended the quarter at $10.18 per share. The SP15MBI, the fund’s prospectus benchmark, returned -0.03% during the quarter. Over the trailing 12-month period ending Sept. 30, 2018, the fund’s institutional gross and net returns outperformed the SP15MBI.

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. To view performance current to the most recent month-end and for after tax returns, click on the Performance tab. Performance does not reflect the maximum 1% sales charge for Class A Shares. If included, it would reduce the performance quoted.

Click the Performance tab for standard fund performance.

Performance Contributors

  • The fund’s duration was kept inside 1.40 years amid rising short-term interest rates, which helped returns relative to the benchmark and to the Lipper and Morningstar peer groups
  • The fund had improving income capture from a large weighting (31%) in floating-rate notes (FRNs), whose coupons increased as their base indexes rose when compared to second-quarter averages.
  • The fund had an overweight in credit (A-rated and BBB-rated securities), as tight credit spreads and additional income carry benefited performance
  • The fund’s security selection significantly benefited performance

Performance Detractors

  • Because yields increased sharply in September, low-coupon fixed-rate tender bonds (2-4 year maturities) underperformed as their prices traded at a discount to par.

How We Are Positioned

With additional rate hikes expected in late 2018 and throughout 2019, management believes the portfolio structure will continue to benefit in terms of yield and total return as the presence of VRDNs, FRNs and 3-month tender-option bond rolls may contribute to higher income and capital stability. We anticipate the Fed likely will continue on its deliberate path to normalizing short-term interest rates and reducing its balance sheet. Despite municipal credit spreads being near post-crisis lows, we remain constructive on A-rated and BBB-rated securities for their incremental carry advantages in an improving economy. We also continue to favor revenue bonds over local and state general obligation bonds.

Click the Portfolio Characteristics tab for information on quality ratings.