Federated Government Ultrashort Duration Fund (A) FGUAX

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

Market Overview

The U.S. Federal Reserve (Fed) kept the fed funds target range unchanged over the third quarter at 1% to 1.25%. Soft inflation readings and a lack of progress on the fiscal-policy front combined to reduce expectations for increases in short-term rates going forward and as a result led to a decline in rates at the front end of the yield curve for much of the quarter. At the September Federal Open Market Committee (FOMC) meeting, the Fed announced the intended implementation of balance-sheet reduction for October, operating according to the principles and plans it had previously announced in June. As such, this action was in line with market expectations. However, rhetoric by Fed officials leading up to and following the FOMC meeting revived market expectations for future increases in short-term interest rates. Movements in the yield on the 2-year U.S. Treasury reflected this shifting sentiment. Beginning the quarter at 1.39%, its yield declined to a low of 1.27% in early September before reversing course to end the quarter at 1.49%.

Fund Performance

The fund slightly underperformed its benchmark, the BofA Merrill Lynch 6-Month Treasury Bill Index, with a return of 0.29% (Institutional Shares at net asset value, or NAV) over the third quarter versus the index at 0.31%. The NAV for the fund (Institutional Shares) ended the quarter unchanged at $9.89. Spreads on floating-rate CMOs and prices on adjustable rate mortgages (ARMs) were stable, leading to little price volatility. The income generated on the fund’s holdings of agency mortgage backed securities (MBS) contributed to fund performance over the quarter. However, a lack of value in the money market sector due to low near-term Fed expectations offset that contribution.

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 Sept. 30, 2017, 44% of the portfolio was invested in agency MBS, down slightly from the previous quarter due to fund inflows. The fund invests primarily in two types of mortgage securities: hybrid-ARM pass-throughs and floating-rate CMOs. Spreads on these securities were stable over the quarter. The rest of the portfolio remained invested in traditional government money market securities, including repurchase agreements collateralized by Treasuries and government agencies. This allocation helped to enhance the liquidity and to reduce the price volatility of the fund.