Federated Government Income Trust (IS) FICMX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Intermediate Bond
As of 03-31-2018

Looking Back

The U.S. economic expansion continued in the first quarter of 2018, aided by improving growth overseas and a generally more positive global economic outlook. The unemployment rate held steady at a low 4.1% as the strong labor market encouraged more people to seek jobs, driving an increase in the labor force participation rate. Companies continued to hold tightly to existing employees as new jobless claims fell to a more than 40-year low during the quarter. The recently enacted tax cuts, federal spending increases and lighter regulatory environment continued to drive a high level of confidence in the economic expansion from both corporations and consumers. The Federal Reserve’s (Fed) favored measure of inflation, Core Personal Consumption Expenditure (PCE), remained somewhat below the target of 2%. However, the newly confirmed Fed Chair, Jerome Powell, stated that the members of the Federal Open Market Committee (FOMC) expect inflation to slowly rise in coming quarters toward the longer-term target. The FOMC raised the federal funds target rate to a range of 1.50-1.75% during its March meeting. The committee continued to reduce the size of the Fed’s balance sheet by gradually allowing a portion of its Treasury and mortgage-backed security (MBS) holdings to roll off without reinvestment over a period of years, subject to certain caps on the pace of the decline in holdings.

Interest rates rose across the curve, with larger increases at the short end and a smaller increase at the 10-year point. The S&P 500 fell during the quarter and risk assets underperformed as concerns related to tariffs and trade restrictions weighed on market sentiment. Outside the U.S., the outlook continued to improve. Growth in Europe, Japan and emerging markets continued in a synchronized advance with the U.S. The fiscal position of the U.S. government continued to be troublesome. Previous budget deals stabilized domestic discretionary spending growth, but the long-term burden of rapidly growing entitlement spending had not been addressed. Total U.S. Treasury debt outstanding is over $21 trillion, more than the entire gross domestic product (GDP) of the U.S.

Treasury rates rose during the period across the yield curve as the markets priced in more interest-rate increases by the Fed. Mortgage securities underperformed similar-duration Treasuries. Within the coupon stack, 4.5% and higher coupons outperformed lower coupons.

As of March 31, 2018, the yield on 2-year Treasury securities rose 38 basis points to end the quarter at 2.27%, and the yield on 10-year Treasury securities rose 33 basis points to end the quarter at 2.74%.

Performance

For the three months ended March 31, 2018, Federated Government Income Trust (Institutional Shares) returned -1.18% versus -1.19% for the unmanaged Bloomberg Barclays US Mortgage Backed Securities Index. The Institutional Shares’ net asset value (NAV) on March 31, 2018, was $9.92.

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.

Duration management made a positive contribution to the fund’s performance as the fund maintained a below-neutral duration stance and yields rose during the period. The fund’s overweight to prepayment-protected mortgage securities contributed to the fund’s performance during the quarter relative to the index due to higher income generated from the prepayment-protected pools. The fund’s overweight to higher coupon mortgages, relative to 3% and 3.5% mortgages, contributed to fund performance as the lower coupon mortgages underperformed during the quarter.

Positioning and Strategy

The fund is overweight higher coupons and underweight 3% and 3.5% coupons. The portfolio contains greater exposure to mortgage securities with characteristics that traditionally lower prepayment risk, such as low loan balances and seasoned MBS issued in previous years relative to the index, which contains higher average loan-balance pools and more recently issued securities. The fund ended the first quarter with a below-neutral duration stance.