Federated Government Ultrashort Duration Fund (A) FGUAX

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

Market Overview

The first quarter was dominated by increased Treasury supply, particularly in Treasury bills, and by further monetary policy action by the Federal Reserve (Fed). In early February, a 2-year budget deal and the accompanying suspension of the debt limit until March of 2019 cleared the way for the Treasury Department to increase issuance. All told, the Treasury brought net new issuance of about $300 billion of Treasury bills to the front end of the market in the weeks that followed. This ballooning pushed yields on short-term securities and repurchase agreements up even before the March Federal Open Market Committee (FOMC) meeting, new Fed Chair Jerome Powell’s first. The FOMC raised the fed funds target range from a range of 1.25-1.50%, to 1.50-1.75%. Movement in the yield on the 2-year Treasury reflected the shifting supply picture, as well as the Fed action. The yield on this security rose 0.38%, from 1.89% at the end of 2017 to 2.27% at the end of March.

Fund Performance

The fund outperformed its benchmark, the BofA Merrill Lynch 6-Month Treasury Bill Index, with a return of 0.34% (Institutional Shares at net asset value, or NAV) over the first quarter versus the index at 0.32%. The net asset value (NAV) for the fund (Institutional Shares) remained unchanged over the quarter at $9.88. During the quarter, spreads on floating-rate collateralized mortgage obligations (CMOs) and adjustable-rate mortgages (ARMs) were relatively stable due to ongoing demand for short-duration assets, while the income offered on these holdings was attractive relative to yields available on traditional government money market securities.

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 on the Performance tab for standard fund performance.

Positioning and Strategy

As of March 31, 2018, 52% of the portfolio was invested in agency mortgage-backed securities (MBS), up slightly from the previous quarter-end position of 48%.The fund invests primarily in two types of mortgage securities: hybrid-ARM pass-throughs and floating-rate CMOs. Because the majority of these securities are floating rate in nature, they benefited from the rise in rates on short-term securities due to the increase in Treasury bill supply, including rates on London interbank offered rate (Libor). The rest of the portfolio remained invested in traditional government money market securities, including repurchase agreements collateralized by the Treasury and government agencies. This allocation helped to enhance the liquidity and to reduce the price volatility of the fund, mitigating price declines in the MBS sector.