Federated U.S. Government Securities Fund: 1-3 Years (Y) FSGTX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Short-Term Bond
As of 09-30-2017

Market Overview

Geopolitical events caused financial-market volatility at times during the third quarter. Saber rattling between the U.S. and North Korea caused fears of global nuclear war and its potential financial-market fallout. Thankfully, nothing more than angry rhetoric took place. This episode produced a flight-to-quality trade bringing the 10-year Treasury rate to a low of 2.01%. However, interest rates spent most of the quarter in a quiet, well-defined range. The Federal Reserve (Fed) announced an October start to reduce its balance sheet of Treasury and mortgage-backed bonds. This action had been well telegraphed by the Fed and didn’t impact the shape of the Treasury curve or relative yields of those securities. The September inflation print broke the string of soft inflation readings. The hurricanes’ impact on gas prices also improved inflation sentiment. Finally, domestic politics helped yields stabilize due to a surprising bipartisan compromise on funding the government and the debt ceiling. This pushed back the fight until the fourth quarter, but a bipartisan approach opened up hope for potential support for tax reform, which is next on the fiscal agenda—after the failed attempt to repeal and replace the Affordable Care Act. On the economy, domestic growth continued at a solid pace, employment continued to grow, business and consumer surveys continued to be optimistic and financial conditions continued to ease. International economies started to exhibit signs of growth and healing from the malaise of the past number of years.

For the quarter, 2-year rates rose 10 basis points and 5-year rates rose 5 basis points. Inflation expectations widened by 25 basis points, and Treasury Inflation-Protected Securities (TIPS) modestly outperformed.

Fund Performance

For the three months ended Sept. 30, 2017, Federated U.S. Government Securities Fund: 1-3 Years (Institutional Shares) returned 0.16% versus 0.24% for the BofA Merrill Lynch 1-3 Year US Treasury Index. The Institutional Shares’ net asset value (NAV) on Sept. 30, 2017, was $10.30.

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

Steady economic growth, with a central bank determined to remove accommodation, keeps the fund with less interest-rate sensitivity relative to the index. Curve exposure was neutral relative to the index. The portfolio continues to own TIPS and commercial mortgage-backed securities (CMBS). However, due to the outperformance of CMBS, the fund trimmed some of these positions and redeployed the proceeds into TIPS. 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.