Federated Adjustable Rate Securities Fund (IS) FEUGX

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

Market Overview

The pace of economic expansion remained steady during the reporting period, supported by continued employment growth, household spending and low inflation. With the economic environment well within Federal Reserve (Fed) expectations, policymakers announced balance-sheet reduction will commence in October 2017. Fixed-income markets performed well with spread sectors posting positive excess returns, while interest rates were steady and measured quarter-over-quarter.

Nonfarm payroll gains averaged 91,000 jobs per month for the reporting period, a rate which appears to have been distorted downward by multiple devastating hurricanes. The unemployment and labor force participation rates continued their positive trends, ending the period at 4.2% and 63.1%, respectively. Record consumer wealth attributed to rising financial markets, and home prices produced solid consumer spending and business investment. The positive economic backdrop gave the Fed confidence to initiate the first step of a balance-sheet normalization program outlined in June 2017. Beginning in October, the Fed will allow the balance sheet to decline by reducing the rate of Treasury and mortgage-backed security (MBS) reinvestment by $6 and $4 billion per month, respectively. As of Sept. 30, 2017, the Fed’s balance sheet was $4.45 trillion, nearly 25% of U.S. gross domestic product (GDP). The initial taper was clearly communicated, and investors were not surprised at its announcement. While the Fed will be buying fewer Treasuries and MBS, mortgage real estate investment trusts (REITs) were significant buyers of government mortgage securities as a result of new equity share issuance. Equity proceeds are invested in mortgage assets on a leveraged basis, producing significant buying power for the trusts. REIT and domestic bank purchases produced strong excess returns for MBS. Securitized assets performed well during the quarter with asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), agency and corporate debt posting positive excess returns.

Two- and 10-year U.S. Treasury yields increased 10 and 3 basis points to yield 1.48% and 2.33%, respectively.

Fund Performance

For the three months ended Sept. 30, 2017, Federated Adjustable Rate Securities Fund (Institutional Shares) returned 0.25% versus 0.25% for the BofA Merrill Lynch 1-Year US Treasury Note Index. The Institutional Shares’ net asset value (NAV) on Sept. 30, 2017, was $9.67.

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.

Adjustable-rate mortgage (ARM) and monthly adjustable collateralized mortgage obligation (CMO) floater securities performed well with minimal price volatility as reflected by the unchanged fund NAV. With the stable NAV, total return was attributed to fund income, which was greater than that of the benchmark. Sector allocation was beneficial.

Positioning and Strategy

Over 93% of fund assets are invested in ARMs and monthly adjustable CMOs. With the Fed instituting rate hikes, monthly adjustable securities indexed off the 1-month London interbank offered rate (Libor) incorporate the higher target rate very quickly, resulting in higher security coupons and fund income. Simultaneously, the monthly reset feature reduces price volatility in a slowly but steadily rising-rate environment, helping the fund produce income with low volatility. Monthly reset floaters complement the ARM pass-through securities, which contain longer reset intervals but offer incrementally higher yield.