Federated Government Ultrashort Duration Fund (SS) FEUSX

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

Market Overview

With continued strength in the U.S. economy and inflation readings approaching 2%, the Federal Reserve (Fed) raised the federal funds target range at its September meeting from 1.75-2% to 2-2.25%. Chair Jerome Powell expressed optimism about the economy at the press conference following that meeting and reinforced expectations for additional rate hikes, including one more in 2018. The summary of economic projections was little changed, reflecting an outlook for solid growth and a long-term fed funds rate of around 3%. Rates on government securities at the front end of the yield curve anticipated the Fed action and the prospect of additional rate hikes in the future. The yield on the 2-year Treasury rose more than 30 basis points, from 2.53% at the end of June to 2.84% right before the Fed move, before retracing slightly to end the third quarter at 2.82%. London interbank offered rates (Libor) adjusted more sluggishly to the Fed action, however. One-month Libor rose 17 basis points and 3-month increased only 6 basis points, to 2.26% and 2.40%, respectively.

Fund Performance

The fund modestly underperformed its benchmark, the BofA Merrill Lynch 6-Month Treasury Bill Index, with a return of 0.45% (Institutional Shares at net asset value, or NAV) over the third quarter versus the index at 0.50%. The NAV for the fund (Institutional Shares) remained unchanged at $9.89. During the quarter, spreads on floating-rate collateralized mortgage obligations (CMOs) were stable while prices on adjustable-rate mortgages (ARMs) and fixed-rate CMOs declined somewhat due to rising interest rates across the yield curve. With much of the floating-rate exposure in the portfolio tied to Libor, the adjustment lag in Libor rates in part contributed to the fund’s modest underperformance.

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 on the Performance tab for standard fund performance.

Positioning and Strategy

As of Sept. 30, 2018, 46% of the portfolio was invested in agency mortgage-backed securities (MBS), up slightly from the previous quarter-end position of 44%. The fund invests primarily in two types of mortgage securities: hybrid-ARM pass-throughs and floating-rate CMOs. The rest of the portfolio remained invested in traditional government money market securities, including repurchase agreements collateralized by the Treasury and government agencies. This allocation helped to enhance the liquidity and to reduce the price volatility of the fund, mitigating price declines in the MBS sector.