3 Questions: Federated Ultrashort Bond Fund 3 Questions: Federated Ultrashort Bond Fund http://www.federatedinvestors.com/static/images/fed-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\dice-hand-small.jpg August 5 2019 July 16 2019

3 Questions: Federated Ultrashort Bond Fund

Fed rate cuts shouldn't affect the way this strategy works.
Published July 16 2019
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“3 Questions” explores investment approaches used by Federated Investors strategists. This installment features Portfolio Manager Randall Bauer.

Q: Could you briefly explain the Federated Ultrashort Bond Fund strategy?

The fund offers investors access to a strategy with a multi-pronged approach, focusing on credit risk, interest-rate risk and liquidity. It is built for investors seeking to reduce their interest-rate exposure—the fund maintains an effective duration of a year or less—while potentially gaining better yields than similar maturity government securities, i.e., they are willing to take some credit risk, but not much. The fund is invested predominantly in investment-grade securities.

Q: What is the appeal of ultrashort bonds now that the Federal Reserve is contemplating a rate cut?

As interest rates fall, a bond fund will tend to hold a higher income stream longer than a money market fund. This is because the higher-coupon securities held in a bond fund purchased prior to any decline in rates will take longer to mature than money market securities, so the higher yield will tend to be maintained for a longer period of time. When securities mature in any mutual fund portfolio, the proceeds need to be redeployed in new securities, which will have lower yields in the event interest rates are falling. If rates don’t decline, there is generally a yield advantage to an ultrashort fund relative to a money fund. Since the majority of an ultrashort’s total return is generated by the yield on the securities in the portfolio, this generally means that an ultrashort fund may generate a higher total return as well.

We believe the fund's conservative profile merits a place in just about every portfolio as a vehicle to help weather uptics in market volatility brought on by either concerns over slowing economic growth or uncertainly over Fed policy.

Q: What is the outlook and positioning for fund over the next 3 to 6 months?

With developments in the marketplace indicating the Fed is more likely to reduce interest rates in the short to intermediate term, the effective duration of the portfolio (i.e., its sensitivity to changes in interest rates) has been increased in order to take advantage of any further decline in market yields. If the Fed does, in fact, lower short-term rates, we expect that the fund will be able to generate some modest amount of capital appreciation in addition to the coupon yield earned on the portfolio.

Tags Interest Rates . Liquidity . Monetary Policy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Duration is a measure of a security's price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of shorter durations.

Investors should carefully consider the fund's investment objectives, risks, charges and expenses before investing. To obtain a summary prospectus or prospectus containing this and other information, contact us or view the prospectus provided on this website. Please carefully read the summary prospectus or prospectus before investing.

Investment-grade securities are securities that are rated at least “BBB” or unrated securities of a comparable quality. Non-investment-grade securities are securities that are not rated at least “BBB” or unrated securities of a comparable quality. Credit ratings are an indication of the risk that a security will default. They do not protect a security from credit risk. Lower-rated bonds typically offer higher yields to help compensate investors for the increased risk associated with them. Among these risks are lower creditworthiness, greater price volatility, more risk to principal and income than with higher-rated securities and increased possibilities of default.

Mutual funds are subject to risks and fluctuate in value.

Past performance is no guarantee of future results.

Ultrashort funds are not "money market" funds. Some money market funds attempt to maintain a stable net asset value through compliance relevant Securities and Exchange Commission rules. Ultrashort funds are not governed by those rules, and their shares will fluctuate in value.

Federated Securities Corp., Distributor