Federated Adjustable Rate Securities Fund (IS) FEUGX

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

Looking Back

The Federal Reserve (Fed) continued tightening monetary policy as the U.S. economy displayed signs of continued strength and expansion. Jerome Powell assumed chairmanship of the Fed’s Board of Governors in the first quarter of 2018 and the Federal Open Market Committee raised the federal funds rate 25 basis points to a range of 1.50-1.75%. The Fed cited a stronger outlook in recent months supported by job creation and a declining unemployment rate. Market yields increased in response to economic strength, signs of inflation and expectations for tighter monetary policy.

The U.S. labor market remained robust. Over 600,000 jobs were created during the quarter. In a sign of strength, the U.S. labor force participation rate increased while initial jobless claims fell to the lowest level since the early 1970s, a time when the domestic labor force was markedly smaller. A robust job market supported consumer confidence and spending, as well as home sales. Solid economic data, historically low unemployment, tighter monetary policy and trade-related concerns translated into higher market yields and underperformance of spread sectors.

Treasury yields increased across the maturity spectrum as the Fed’s two-pronged strategy of higher federal fund rates and lower quantitative easing (QE) reinvestments reduced demand for government debt. Higher market yields led to underperformance for a wide variety of fixed-income classes as investment-grade and high-yield debt, commercial and residential mortgage-backed securities (MBS) and asset-backed securities (ABS) posted negative excess returns.

Higher interest rates, lower levels of refinance activity and high market volatility made for a challenging market for mortgage securities. Rising interest rates served to lengthen mortgage security average lives as refinance opportunities diminished. As a result, MBS effective durations extended in the rising-rate environment. Simultaneously, the Fed curtailed security purchases in accordance with its schedule to wind down the QE program. Government-issued MBS experienced spread widening during the period, leading to sector underperformance.

Two- and 10-year U.S. Treasury yields increased 38 and 33 basis points to yield 2.27% and 2.74%, respectively.


For the three months ended March 31, 2018, Federated Adjustable Rate Securities Fund (Institutional Shares) returned 0.30% versus 0.25% for the BofA Merrill Lynch 1-Year US Treasury Note Index. The Institutional Shares’ net asset value (NAV) on March 31, 2018, was $9.64.

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 mortgages (ARM) and monthly adjustable collateralized mortgage obligation (CMO) floater securities performed well as price volatility was subdued despite significant upward interest-rate movements for short-maturity Treasuries. One- and 2-year yields spiked 35 and 38 basis points, respectively, while the NAV declined $0.01. Floater and adjustable-rate mortgage yield spreads were stable, and sector allocation aided fund performance.

Positioning and Strategy

Over 93% of fund assets are invested in ARMs and monthly adjustable securities. Responsiveness to changes in short-term interest rates resulted in increased portfolio income and yield while price volatility has been subdued. With another Fed rate hike in March 2018 and the expectation for further tightening of monetary policy in future months, portfolio strategy remains largely unchanged from recent quarters.