Federated Municipal Ultrashort Fund (IS) FMUSX

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


  • The fund’s quarterly net performance essentially matched benchmark; 12-month trailing net returns significantly exceeded benchmark
  • Cautious defensive duration posture was warranted (0.39 years)
  • Fund had high floating/variable-rate exposure (74% at quarter-end)

Looking Back

Municipal bond and Treasury yields climbed higher as the Federal Reserve (Fed) raised short-term target rates at its March meeting amid the ongoing U.S. economic expansion. Concern that the Fed may excessively tighten monetary policy and the prospect of escalating trade conflicts due to the Trump administration’s proposed targeted tariffs caused stock markets to decline and Treasury and municipal yields to retrace somewhat from their highs during the quarter. The new issuance of municipal bonds fell about 30% during the first quarter compared to the same period last year as the acceleration of deals into fourth quarter 2017 to beat the tax legislation left a diminished calendar of financings. Demand for municipal bonds was somewhat muted as banks and insurance companies reacted to the large corporate tax cut by selling a portion of their municipal holdings. Also, individual investor demand for bonds and municipal mutual funds was muted as total returns turned modestly negative.

In March, Fed Chair Jerome Powell oversaw his first Federal Open Market Committee meeting and his first hike, as policymakers raised the target range of the federal funds rate from 1.25-1.50% to 1.50-1.75%. In announcing its decision, the Fed cited strong labor market conditions and robust business and consumer confidence, but noted consumer spending had moderated and inflation still remained below its target. Projections for steady growth in gross domestic product (GDP), inflation and employment contributed to expectations for a modest number of rate increases in 2018 and 2019, likely three in each.

For the quarter, yields on AAA-rated 2-, 5-, 10- and 30-year municipal securities increased 9 basis points, 36 basis points, 44 basis points and 41 basis points, respectively. Yields on 2-, 5-, 10- and 30-year Treasury securities increased 38 basis points, 36 basis points, 33 basis points and 23 basis points, respectively.

The Bloomberg Barclays Municipal Bond Index (BBMBI), the broad market index, posted a return of -1.11% for the quarter. The Bloomberg Barclays 1-Year U.S. Municipal Bond Index (BB1MBI), the fund’s prospectus benchmark containing only bonds maturing in one to two years, returned 0.38% for the quarter. The 3-year component of the BBMBI (2-4 year maturities) returned 0.11%, the 5-year component (4-6 year maturities) returned -0.57%, the 10-year component (8-12 year maturities) returned -1.61% and the portion maturing in 22 years or more posted a return of -1.56%.

The 7-day SIFMA Municipal Swap Index had a fairly volatile first quarter largely for the same reasons as it did in the final months of 2017: modest demand, excess supply of variable-rate demand notes (VRDNs) and the Fed tightening in March. The index fell throughout January from its elevated levels in December (ending 2017 at 1.71%), hitting a low of 0.98% in early February. It then stabilized until spiking in March to end the quarter at 1.58%. The 1-year MIG 1 fixed-rate note fluctuated for the same reasons, beginning the quarter at 1.46% and ending at 1.63%.


During the first quarter of 2018, the fund had net total returns of 0.33% for the Institutional Shares (IS) and 0.22% for the Class (A) Shares at net asset value (NAV). Quarterly tax-exempt dividends comprised 100% of the total return for both share classes as the NAV remained unchanged at $9.99 per share. The BB1MBI, the fund’s prospectus benchmark, returned 0.38% during the quarter. Over the trailing 12-month period ending 3/31/18, the fund’s institutional shares’ gross and net returns handily beat the BB1MBI.

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. To view performance current to the most recent month-end and for after tax returns, click on the Performance tab. Performance does not reflect the maximum 2% sales charge for Class A Shares. If included, it would reduce the performance quoted.

Click the Performance tab for standard fund performance.

Performance Contributors

  • The fund’s duration was shortened from 0.49 years to 0.39 years amid rising interest rates, which helped performance relative to the benchmark and Lipper Short Municipal Debt Funds peers (0-3 year duration peer group)
  • The fund had improving income capture from large weightings in floating-rate notes (FRNs) and VRDNs as both SIFMA- and Libor-based indexes for these instruments and their coupons rose over the quarter. At quarter-end, FRNs and VRDNs comprised 43% and 31%, respectively, of the fund, well in excess of the benchmark
  • FRN spreads to the base indexes also tightened over the quarter, contributing to price performance. VRDNs added absolute par price stability and liquidity along with a modest credit spread
  • The fund’s overweight allocation to Health Care and Transportation benefited performance

Performance Detractors

  • Low coupon fixed-rate short maturity bonds (3-5 year maturity) suffered disproportionately in price due to subpar structure and discount prices as yields increased

How We Are Positioned

With additional rate hikes expected in 2018 and 2019, management believes the portfolio structure will continue to benefit in terms of yield and total return, as the presence of VRDNS, FRNs and 3-month tender-option bond rolls may contribute to higher income and capital stability. We anticipate that the Fed, under new leadership from Powell, is likely to continue its deliberate but slow path to normalization of short-term interest rates and the reduction in its balance sheet. Despite credit spreads being near post-crisis lows, we remain constructive on A-rated and BBB-rated securities for their incremental carry advantages in an improving economy. We also continue to favor revenue bonds over local and state general obligation bonds.

Click the Portfolio Characteristics tab for information on quality ratings.