Federated Municipal Ultrashort Fund (A) FMUUX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Muni National
As of 06-30-2018


  • The fund’s quarterly net performance just slightly lagged 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 (75% at quarter-end)

Looking Back

The second quarter of 2018 saw the U.S. economy withstand bumps and bruises while maintaining momentum and again receiving the blessing of the Federal Reserve (Fed).

After raising the federal funds target range in March, the central bank moved closer to entering a tightening cycle with a hike in June that raised the fed funds rate to a target range of 1.75-2%, while also projecting two more similar size increases to take place in 2018 instead of one. The Fed has characterized rate action since ultra-low levels following the financial crisis as “normalizing” monetary policy. However, the second quarter saw it move closer to a bona-fide “tightening” cycle. This was not just because of the hike, but also because it increased to $30 billion a month the pace of quantitative tapering (QT) to reduce its mammoth balance sheet. Lastly, the Fed made progress on returning to a full complement of governors. It has operated with only three of seven for some time, counting new Chair Jerome Powell. President Trump nominated two more in April, including one for the important vice chair position.

The labor market continued its own tightening over the 3-month period, with the Bureau of Labor Statistics reporting stronger-than-expected employment figures in May: healthy gains of 223,000 jobs and the closely watched unemployment rate declining to 3.8%—matching April 2000 as the lowest level in nearly half a century. Related to this, average hourly earnings ticked up. Inflation percolated but did not boil, remaining below the Fed’s established goal of 2%. However, other economic indicators and sectors improved in the second quarter, led by strong retail sales, robust manufacturing activity and solid gains in the service industry.

While global political events—including a summit between the U.S. and North Korea, a brewing trade war and a political crisis in Italy—dominated the news cycle, a lesser-known issue worried some investors in cash markets: a growing spread between the 3-month London interbank offered rate (Libor) and the Overnight Index Swap (OIS). But this widening was not due to poor credit of European banks, but rather because of excess bill supply issued by the Treasury Department to fund the government and the Fed’s QT. Both undertakings flooded the market with short-term Treasury bills, pushing rates up.

The volatility of the 7-day SIFMA Municipal Swap Index, a proxy for 7-day variable-rate demand notes (VRDNs), continued into the second quarter and it could be the new norm. This is partly due to higher rates in general but also a tighter supply/demand balance in the tax-exempt money market space. The second quarter had the additional event of the individual tax-filing deadline, which typically results in outflows. The index climbed to 1.81% in mid-April, then fell to a quarterly low of 1.05% in early June. This produced supply pressure, which, aided by the Fed tightening, drove the index higher to end the quarter at 1.51%. For similar reasons, the 1-year MIG-1 scale rose to 1.75% in late April and remained around that level through May. In June, issuance of 1-year notes begin to spike (“summer note season” generally runs from June through August). Surprisingly, this supply was met with strong demand and the scale fell to 1.55% in early June. Since then, it has backed off slightly and ended the quarter at 1.58%.

For the quarter, yields on AAA-rated 2-, 5-, 10- and 30-year municipal securities decreased by 1 basis point and 4 basis points, increased by 5 basis points and decreased by 1 basis point, respectively. Yields on 2-, 5-, 10- and 30-year Treasury securities increased by 25 basis points, 18 basis points, 11 basis points and 1 basis point, respectively.

The Bloomberg Barclays Municipal Bond Index (BBMBI), the broad market index, posted a return of 0.87% 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 0.59% for the quarter. The 3-year component of the BBMBI (2-4 year maturities) returned 0.69%, the 5-year component (4-6 year maturities) returned 0.87%, the 10-year component (8-12 year maturities) returned 0.90% and the portion maturing in 22 years or more posted a return of 0.92%.


During the second quarter of 2018, the fund had net total returns of 0.49% for the Institutional Shares (IS) and 0.38% for the Class (A) Shares at net asset value (NAV). Quarterly tax-exempt dividends were supplemented by 1 cent of price appreciation as the fund’s NAV rose to $10.00 per share. The BB1MBI, the fund’s prospectus benchmark, returned 0.59% during the quarter. Over the trailing 12-month period ending 6/30/2018, 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 held relatively steady over the quarter, beginning and ending at 0.39 years amid generally steady short-term 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 over the quarter from large weightings in floating-rate notes (FRNs) and variable-rate demand notes (VRDNs), as both SIFMA- and Libor-based indexes for these instruments and their coupons rose relative to first quarter averages. At quarter-end, FRNs and VRDNs comprised 48% and 27%, 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 benefited performance

Performance Detractors

  • Because yields declined slightly, the overweight in VRDNs relative to benchmark detracted from performance, as VRDNs (par instruments) did not move up in price and provided a slightly lower average income return over the quarter when compared to bonds from 1-2 years in maturity.

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 the Fed, under new leadership from Powell, is likely to continue its deliberate path to normalization of short-term interest rates and the continued reduction of its balance sheet. Despite municipal 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.