Federated Short-Intermediate Duration Municipal Trust (A) FMTAX

Share Classes Product Type Asset Class Category
Mutual Fund Fixed Income Muni National
As of 06-30-2018

Performance Highlights

  • The fund’s quarterly net performance slightly lagged benchmark, but trailing 12-month returns far exceeded benchmark
  • Cautious duration posture (1.4 years), remains warranted for 2018
  • Fund has high floating/variable-rate exposure (36% at quarter-end)

Looking Back

The second quarter of 2018 saw the U.S. economy withstand bumps and bruises while maintaining momentum and again receiving the blessing of the Federal Reserve (Fed).

After raising the federal funds target range in March, the central bank moved closer to entering a tightening cycle with a hike in June that raised the fed funds rate to a target range of 1.75-2%, while also projecting two more similar size increases to take place in 2018 instead of one. The Fed has characterized rate action since ultra-low levels following the financial crisis as “normalizing” monetary policy. However, the second quarter saw it move closer to a bona-fide “tightening” cycle. This was not just because of the hike, but also because it increased to $30 billion a month the pace of quantitative tapering (QT) to reduce its mammoth balance sheet. Lastly, the Fed made progress on returning to a full complement of governors. It has operated with only three of seven for some time, counting new Chair Jerome Powell. President Trump nominated two more in April, including one for the important vice chair position.

Municipal bond yields were little changed while Treasury yields moved higher amid continued U.S. economic expansion, somewhat higher inflation and the increase in the short-term target rate by the Fed. Yields on 2-, 10- and 30-year Treasury securities increased by 26, 12 and 2 basis points, respectively. In contrast, Municipal Market Data (MMD) 2- and 30-year AAA tax-exempt yields each decreased by 1 basis point and the 10-year AAA tax-exempt yield increased by 4 basis points. Modest gross new issuance of municipal bonds combined with generally stable demand to support relative outperformance of municipal yields relative to Treasury yields. Gross new issuance of municipal bonds through June 2018 was down nearly 25% compared to the average level at mid-year over the prior three years. The enactment of federal tax reform in 2017 accounts for much of the decline in new issuance this year. The federal tax bill eliminated tax-exempt advance refunding bonds and prompted a surge in municipal new issuance late last year, leaving a diminished calendar of financings.

The S&P Municipal Bond Index returned 0.91% for the quarter. The 3-year component of the index posted a return of 0.60%, the 10-year component returned 0.78% and the portion of the index maturing in 22 years and longer returned 1.39%. The AAA-, A- and BBB-rated components of the index returned 0.67%, 0.89% and 1.42%, respectively. The S&P 1-5 Year National AMT-Free Municipal Bond Index (SP15MBI), the fund’s prospectus benchmark, posted a return of 0.65%.

Performance

During the second quarter of 2018, the fund had total returns of 0.54% for the Institutional Shares (IS), 0.48% for the Service Shares (SS) and 0.41% for the Class (A) Shares at net asset value (NAV). For the IS shares, the fund’s AMT-free, tax-exempt income was enhanced by 1 cent of NAV appreciation as the NAV ended the quarter at $10.21 per share. The SP15MBI, the fund’s prospectus benchmark, returned 0.65% during the quarter. Over the trailing 12-month period ending 6/30/2018, the fund’s institutional gross and net returns significantly outperformed the SP15MBI.

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. To view performance current to the most recent month-end and for after tax returns, click on the Performance tab. Performance does not reflect the maximum 1% sales charge for Class A Shares. If included, it would reduce the performance quoted.

Click the Performance tab for standard fund performance.

Performance Contributors

  • The fund had improving income capture from a large weighting (30%) in floating-rate notes (FRNs), as both the SIFMA- and Libor-based indexes and FRN coupons rose when compared to first-quarter averages. FRN spreads to the base indexes also tightened, contributing to incremental price performance
  • The fund had an overweight in credit (A-rated and BBB-rated securities), and tight credit spreads and additional income carry benefited performance
  • The fund’s overweight allocation to Health Care benefited performance

Performance Detractors

  • The fund’s duration was shortened slightly from 1.41 years to 1.37 years, but as short municipal yields fell only slightly over the quarter in the 3- to 5-year space, this positioning modestly detracted from performance relative to the prospectus benchmark (duration of 2.42 years).

How We Are Positioned

With additional Fed rate hikes expected in 2018 and into 2019, management believes the portfolio structure will continue to benefit in terms of yield and total return, as the presence of FRNs may help contribute to higher income and capital stability. We anticipate that the Fed, under new leadership from Powell, is likely to continue its deliberate path to normalization of short-term interest rates and the continued reduction in its balance sheet. With that, a cautious duration posture for the fund is warranted. Despite credit spreads being near post-crisis lows, we remain constructive on A-rated and BBB-rated securities for their incremental carry advantages in an improving economy. We also continue to favor revenue bonds over local and state general obligation bonds.

Click the Portfolio Characteristics tab for information on quality ratings.