Federated U.S. Government Securities Fund: 2-5 Years (R) FIGKX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Short-Term Bond
As of 09-30-2018

Market Overview

The Federal Reserve (Fed) raised overnight lending rates in September, continuing its gradual normalization of overnight interest rates. Labor statistics pointed to a robust employment market. The unemployment rate finished the third quarter at 3.7%. For all intents and purposes, the Fed reached its mandate of full employment. Wage gains have been tepid in response to the tight labor market. However, we saw the first hints of growth when the average hourly earnings for August showed a 0.4% monthly gain, increasing the year-over-year wage gain to a new cycle high of 2.9%. Inflation remained near the Fed’s 2% target. Given that inflation undershot its target for nine years, the Fed indicated a desire to let it run above target without dramatically increasing rates to combat rising prices.

The administration’s focus on fair and reciprocal international trade intensified during the quarter. New tariffs were announced on an expanded list of goods imported from China. It is expected the Trump administration will continue to pressure China to reduce its large trade surplus with the U.S. So far, the market has taken these tensions in stride. Other events that caused market gyrations during the quarter were the strength of the dollar hurting the performance of emerging market securities of Turkey, Argentina and Brazil. Given these events, financial market volatility remained contained during the quarter. The strength of the economy continued to dominate trade and geopolitical headlines in determining financial market returns.

The Treasury yield curve flattened during the quarter as shorter maturity notes rose more in yield than longer maturity bonds. For the quarter, 2-year Treasury rates rose 29 basis points and 5-year rates rose 22 basis points. Inflation expectations were stable around 2.1% since the first quarter. Spreads on agency debt were little changed.

Fund Performance

For the three months ended Sept. 30, 2018, Federated U.S. Government Securities Fund: 2-5 Years (Institutional Shares) returned -0.22% versus -0.01% for the ICE BofAML 3-5 Year US Treasury Index. The Institutional Shares’ net asset value (NAV) on Sept. 30, 2018, was $10.50.

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

The fund maintained less interest-rate sensitivity relative to the index. Given the aggressive back-up in yields, the fund’s duration underweight is relatively small. The fund spent most of the quarter with a curve exposure expressing a neutral position relative to the index. Agency debt was added to the fund via bullet and callable structures. This sector offered relative attractive spread to maturity-matched Treasury securities. Also, the outright yield levels presented attractive income relative to Fed expectations for the remainder of the calendar year. The fund exited its exposure to the inflation sector. While economic fundamentals and trade policy support increasing inflation, seasonal negative carry made other sectors more attractive than Treasury Inflation-Protected Securities. The fund holds positions in 15-year agency residential mortgage-backed securities. These bonds have attractive prepayment characteristics and should provide the fund with considerably more income than Treasury securities. Many relative value trades were executed in Treasury notes to lock in higher rates. Options on Treasury futures were implemented as a way to manage volatility and increase income in the portfolio.