Federated Short-Intermediate Total Return Bond Fund (SS) FGCSX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Short-Term Bond
As of 12-31-2017

Highlights

  • Passage of the tax reform bill supports a risk-on environment for the financial markets
  • Credit spreads below median, but room to tighten further on possible Federal Reserve moves and continued economic growth
  • The fund remains in a short duration posture, as yields, particularly at the front-end of the yield curve, have risen

Looking Back

The fourth quarter of 2017 was much like the full year in that financial returns from higher-beta risk assets were stronger than those from less risky assets. The passage of the tax reform bill drove the increased risk appetite evident in the financial markets. During the fourth quarter, the yield on the 10-year U.S. Treasury rose from 2.33% to 2.41%, after briefly touching 2.50% in mid-December. The Treasury yield curve continued to flatten, as front-end yields rose more than yields of longer maturities. Risk assets outperformed, led by equities, copper and crude oil, as high yield, emerging markets (EM), investment-grade debt and gold posted small gains, while Treasuries had very modest returns and Treasury Inflation-Protected Securities (TIPS) outperformed Treasuries.

As mentioned, with the rise in interest rates, total returns for fixed-income sectors were positive, but more modest than for equities. The theme of risk-on still applied, however. High yield had total returns of 0.47%, EM increased 0.61% and investment-grade credit rose 1.05% with the BBB quality sector adding 1.23%, according to Bloomberg Barclays data. Mortgage-backed securities (MBS) returned 0.16%, while Treasuries returned 0.05%.

Performance

Federated Short Intermediate Total Return Bond Fund Institutional Shares returned -0.18% at net asset value (NAV) for the fourth quarter of 2017, while the fund’s benchmark, the Bloomberg Barclays 1-5 year Government Credit Index, had a total return of -0.30%. The fund’s total return for the period also reflected actual cash flows, transaction costs and other expenses that were not reflected in the total return of the benchmark index.

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.

Click on the Portfolio Characteristics tab for information on quality ratings.

Performance Contributors

  • The fund was underweight interest-rate exposure relative to the benchmark
  • Overweight to investment-grade credit
  • Allocation to high yield and to MBS
  • Underweight to U.S. Treasury
  • Outperformance in capital goods, energy and technology holdings

Performance Detractors

  • Weaker security selection in the consumer cyclical and transportation sectors
  • Slight detraction from use of financial futures to achieve duration target reflected in yield-curve positioning

How We Are Positioned

Macroeconomic fundamentals are positive with improving U.S. and global economic growth, rising employment and strong consumer confidence, abetted by the recently enacted U.S. tax changes. The investment-grade and high yield corporate bond environment remains solid, as earnings growth for the full year 2018 is expected to be in low double digits. Profit margins remain strong, but could come under pressure if wages rise faster than expected, in which case the Federal Reserve likely would become more active. On the technical side, demand remains robust for new corporate bond issuance, though new supply is expected to decline year-over-year.

While valuations on many sectors already reflect much of this optimism, our outlook is for continued spread tightening, though perhaps not of the magnitude seen in 2017. In keeping with Federated’s Alpha Pod recommendations, the fund is short its benchmark duration, with an overweight to investment-grade corporate bonds, and allocations to high yield and MBS.