Federated U.S. Government Securities Fund: 2-5 Years (IS) FIGTX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Short-Term Bond
As of 06-30-2018

Market Overview

The Federal Reserve (Fed) raised overnight lending rates in June. This marked the eighth increase since the Fed began normalizing interest rates in December 2015. The labor statistics continued to point to a strong and robust employment market. The unemployment rate finished the quarter at 3.8%. For all intents and purposes, the Fed reached its mandate of full employment as inflation reached the Fed’s 2% target during the quarter. Given that inflation undershot its target for nine years, the Fed indicated a desire to let it run above target without dramatically increasing rates to combat rising prices. The path forward on inflation is highly uncertain. Oil traded higher due to supply restrictions from OPEC and increased global demand. However, wage gains were tepid in response to the tight labor market. Inflation expectations were stable around 2.1% since the first quarter. The Treasury yield curve flattened during the quarter as shorter-maturity notes rose more in yield than longer-maturity bonds. The Fed communicated its desire to increase rates in a deliberate and methodical pace.

The administration announced new tariffs on certain goods and countries with which it deemed to have an unfair trading relationship. Its goal is for fair and reciprocal trade. This escalation of trade tensions with major trading partners, both geopolitical allies and adversaries, created much commentary regarding future growth and inflation prospects. So far, the market has taken these tensions in stride. Other events that caused market gyrations during the quarter were the strength of the dollar hurting the performance of emerging market securities of Turkey, Argentina and Brazil. Given these events, financial market volatility remained contained during the quarter. The strength of the economy continued to dominate trade and geopolitical headlines in determining financial market returns.

For the quarter, 2-year Treasury rates rose 26 basis points and 5-year rates rose 18 basis points. Inflation expectations widened by 3 to 7 basis points, and Treasury Inflation-Protected Securities (TIPS) modestly outperformed.

Fund Performance

For the three months ended June 30, 2018, Federated U.S. Government Securities Fund: 2-5 Years (Institutional Shares) returned -0.16% versus -0.01% for the ICE BofA Merrill Lynch 3-5 Year US Treasury Index. The Institutional Shares’ net asset value (NAV) on June 30, 2018, was $10.58.

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.

Positioning and Strategy

The fund maintained less interest-rate sensitivity relative to the index. Given the aggressive back-up in front-end yields, the fund’s duration underweight is relatively small. The fund spent most of the quarter with a curve exposure expressing a neutral position relative to the index. Agency debt was added to the fund. This sector offered relative attractive spread to maturity-matched Treasury securities. Also, the outright yield levels presented attractive income relative to Fed expectations for the remainder of the calendar year. Agency residential mortgage-backed securities were also added to the fund. Outright yield levels, with attractive prepayment characteristics on 15-year mortgages, will provide the fund with considerably more income than Treasury securities. The fund continues to have an allocation to the inflation sector. Tariffs, the tight domestic labor market and buoyant global growth support a rise in inflation. Many relative value trades were executed in Treasury notes to lock in higher rates.

Options on Treasury futures were implemented as a way to manage volatility and increase income in the portfolio.