Federated Municipal Ultrashort Fund (A) FMUUX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Muni National
As of 09-30-2018


  • The fund’s quarterly net performance beat the benchmark; 12-month trailing net returns exceeded benchmark
  • Cautious defensive duration posture was warranted (<0.40 years)
  • Fund had high floating/variable-rate exposure (76% at quarter-end)

Looking Back

In its June policy-setting meeting, the Federal Reserve (Fed) laid out a relatively straight path to a September rate hike, which came to pass with a quarter-point increase in the target range to 2-2.25%. But there was a slight bump, as President Trump publically criticized the central bank for raising rates because of their potential to stem economic growth. Fed Chair Jerome Powell addressed this by stating in September that the central bank does not consider political elements when setting policy. September’s rate hike was not the only policy tool the Fed implemented during the reporting period. It continued to expand its quantitative-tapering (QT) plan that allows maturing Treasuries and government agency securities to roll off its massive balance sheet. The resulting increase in supply in the marketplace nudged rates even higher, particularly as the amount of maturing securities not reinvested per quarter has grown from an initial $30 billion in the fourth quarter of 2017 to $120 billion in the reporting period.

On the macro level, the housing market continued to soften, as supply decreased and mortgage rates edged up. But most economic indicators were solid, if not robust: job growth, consumer confidence, retail sales, manufacturing and service activity, and capital expenditures all hit or were near cycle—and in some cases multi-decade—highs during the 3-month period. Gross domestic product accelerated even as inflation remained moderate and manageable. The quarter saw intensification of tariffs by the Trump administration on China, and responses in kind. But while edging ever closer to a full-blown trade war and facing opposition from select U.S. industries, the duties did not result in meaningful headwinds for the domestic economy. A trade deal with Mexico suggested that at the end of the day, a transactional Trump wants deals, not conflict. Although the trade skirmishes began to affect the global economy, greater impact was felt from U.S. dollar strength, particularly in emerging markets. But the most prominent troubled areas, such as Turkey, Argentina and Indonesia, faced idiosyncratic struggles, suggesting a contagion was not in the works.

Year-long volatility in the 7-day SIFMA Municipal Swap Index finally abated in August. The exceptional fluctuation can be seen from both the large drop from a high of 1.81% in mid-April to a low of 0.94% in late July, as well as significant week-to-week movement. In mid-August, however, the index stabilized, ranging between 1.45% and 1.58% and ending the quarter at 1.56%. The Fed rate hike likely will put upward pressure on the index as we enter the fourth quarter. One-year note issuance had significantly lagged behind 2017 figures until the late-August sale of $7.2 billion by the state of Texas. This, along with the general increase in interest rates, pushed the 1-year MIG-1 scale from 1.58% to 1.95%.

For the quarter, the yield curve flattened as yields on AAA-rated 2-, 5-, 10- and 30-year municipal securities increased by 33, 21, 12, and 25 basis points, respectively. Yields on 2-, 5-, 10- and 30-year Treasury securities increased by 29, 21, 20 and 21 basis points, respectively.

The Bloomberg Barclays Municipal Bond Index (BBMBI), the broad market index, posted a return of -0.15% 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 -0.02% for the quarter. The 3-year component of the BBMBI (2-4 year maturities) returned -0.12%, the 5-year component (4-6 year maturities) returned -0.20%, the 10-year component (8-12 year maturities) returned 0.06% and the portion maturing in 22 years or more posted a return of -0.48%.


During the third quarter of 2018, the fund had net total returns of 0.19% for the Institutional Shares (IS) and 0.08% for the Class (A) Shares at net asset value (NAV). Quarterly tax-exempt dividends were partially offset by 2 cents of price depreciation as the fund’s NAV fell to $9.98 per share. The BB1MBI, the fund’s prospectus benchmark, returned -0.02% during the quarter. Over the trailing 12-month period ending Sept. 30, 2018, the gross and net returns of the fund’s institutional shares 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 kept inside 0.4 years amid rising short-term interest rates, which helped returns relative to the benchmark and to the Lipper Short Municipal Debt Funds peers (0-3 year duration peer group)
  • The fund had improving income capture and relative price stability over the quarter from large weightings in floating-rate notes (FRNs) and variable-rate demand notes (VRDNs). FRN coupons increased as their base indexes rose when compared to second-quarter averages. At quarter-end, FRNs and VRDNs comprised 48% and 28% of the fund, respectively—well in excess of the benchmark
  • VRDNs provided absolute par price stability and liquidity along with a modest credit spread
  • The fund’s security selection significantly benefited performance

Performance Detractors

  • Because yields increased sharply in September, low-coupon fixed-rate tender bonds (2-4 year maturities) underperformed as their prices traded at a discount to par

How We Are Positioned

With additional rate hikes expected in late 2018 and throughout 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 likely will continue on its deliberate path to normalizing short-term interest rates and reducing 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.