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 12-31-2017

Market Overview

The Federal Reserve (Fed) raised overnight lending rates in December for the third time in 2017. After having forecasted multiple rate increases in previous years but actually only hiking once per each of them, 2017 finally saw the Fed deliver on a year-ahead forecast. In the fourth quarter, the Fed also started shrinking its balance sheet in a plan, announced the preceding quarter, of purchasing $6 billion fewer Treasuries per month from its maturing Treasury positions accumulated during its asset purchase program and $4 billion fewer government mortgage-backed securities (MBS). Saber rattling between North Korea and the U.S., which caused a sharp but brief flight-to-quality bid in Treasuries in the third quarter, quieted down this quarter. After the failure to repeal and replace the Affordable Care Act, expectations of U.S. fiscal policy reform were quite low compared to post-election exuberance. However, the Republican-held Congress was able to coalesce around a tax bill that lowered corporate and individual tax rates. Supportive tax policy, business-friendly regulatory changes and improved overseas economic growth kept risk assets rising. The real U.S. economy was on solid footing in the fourth quarter, and business and consumer confidence remained at high levels. The labor market continued to be strong and steady, with the Fed admitting it had probably met its mandate for full employment. Inflation continued to lag behind its goal of 2% growth, but fears of deflation receded.

For the quarter, 2-year Treasury rates rose 40 basis points and 5-year rates rose 27 basis points. Inflation expectations widened by 10 basis points, and Treasury Inflation-Protected Securities (TIPS) modestly outperformed.

Fund Performance

For the three months ended Dec. 31, 2017, Federated U.S. Government Securities Fund: 2-5 Years (Institutional Shares) returned -0.54% versus -0.57% for the BofA Merrill Lynch 3-5 Year US Treasury Index. The Institutional Shares’ net asset value (NAV) on Dec. 31, 2017, was $10.76.

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 spent the quarter with less interest-rate risk than the index. As rates moved higher during the reporting period, the fund trimmed the size of its short duration position, but continued to be short duration relative to the index. Curve exposure was adjusted during the reporting period. The fund spent most of the quarter with a curve exposure expressing a position that short rates would underperform longer maturity issues. However, as the year came to a close and the curve had reached flat levels, the fund switched to a steepener, i.e., favoring shorter maturity issues relative to longer maturity issues. The portfolio continues to own TIPS and commercial mortgage-backed securities (CMBS). However, the fund sold TIPS as they slightly outperformed during the quarter. These securities offer the potential for attractive relative value to nominal Treasuries for income from inflation accrual and their pricing to the Fed’s long-run inflation target.

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