As of 03-31-2018


  • Economic and earnings growth still supportive of spread product despite recent volatility
  • Cautious duration posture remains warranted moving through 2018
  • Fund’s high floating-rate exposure (65% at quarter-end) helped to maintain capital stability

Looking Back

The Federal Reserve (Fed) continued its normalization of interest-rate policy in the first quarter of 2018 by raising the federal funds target rate range by 25 basis points, the sixth such move since December of 2015. The range now stands at 1.50%-1.75%, and most market participants believe it will be increased during 2018, perhaps by as many as three additional times. The program to reduce the size of the Fed’s balance sheet began in October and represents an ancillary form of monetary tightening. Fund duration was maintained in the 0.45-0.50 year range during the quarter, at the shorter end of the fund’s normal 0.4-1.0 year duration range.

While interest rates increased in general over the course of the first quarter, once again, short-term yields increased more than longer-term ones, a common reaction when the Fed is believed to be in a tightening mode. The yield on the 2-year Treasury note ended up increasing by 38 basis points in the first quarter, from 1.89% at 12/31/17 to 2.27% at 3/31/18. The 5-year point of the Treasury curve increased by 35 basis points over the same period, from 2.21% to 2.56%, and the 10-year point increased by only 33bps, from 2.32% to 2.41%. With regard to credit metrics, the spread (option-adjusted) on the Bloomberg Barclays 1-3 year Credit Index widened from 0.40% at 12/31/17 to 0.56% at 3/31/18. The spread on the Bloomberg Barclays ABS Index, which at 2.10 years in duration represents a reasonable proxy for short-term spreads in securitized product, also widened significantly, from 0.34% at 12/31/17 to 0.48% at 3/31/18.

Fund Performance

Federated Ultrashort Bond Fund’s return on Institutional Shares at net asset value (NAV) for the quarter was 0.28%, compared with returns on the Lipper Ultrashort Obligations Funds Average of 0.15%, a return on the Bank of America Merrill Lynch 1-Year Treasury Bill Index of 0.17%, and a return on the Bloomberg Barclays Short-Term Government/Credit Index (BBSTGCI) of 0.32%.

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.

Also click the Performance tab for standard fund performance.

Performance Contributors

The fund’s fairly short duration and income capture from spread securities over the course of the quarter placed the product in the midst of its benchmarks for the quarter despite higher interest rates and wider credit spreads. The fund’s floating rate exposure at 3/31/18 stood at 65%, 5 percentage points higher than the same metric at 12/31/17. Floating-rate securities benefitted from the London interbank offered rate (Libor), which has increased over the past year in response to changes in Fed policy. Management believes further Fed rate increases will continue to benefit the portfolio in terms of both yield and total return, while the presence of more floating-rate paper should help to maintain capital stability.

Performance Detractors

The widening of credit spreads over the course of the quarter adversely affected performance relative to portfolios with lower allocations to credit-sensitive securities (such as the BBSTGCI). Higher rates also had some effect even though the fund maintained a very low duration profile.

How We Are Positioned

Continued growth in the U.S. economy and labor force conditions consistent with “full employment” are expected to keep the Fed “in play” with regard to higher interest rates for the remainder of 2018. While certain inflationary measures are showing signs of life, there still appears to be an absence of meaningful price pressure. Moving into second quarter 2018, short credit levels have widened to levels that once again offer some value, and management continues to maintain a credit overweight in the portfolio, albeit a smaller one than in years past. There still is some room for spreads to tighten, as long as the economy continues to perform reasonably and foreign demand for yield continues. A tax-cut supported extension of the current economic cycle seems to be providing a tailwind for corporate earnings and support for tighter credit spreads. On the other hand, caution may be warranted if the current protectionist rhetoric out of Washington escalates into a growth-stunting trade war.