SEMI-ANNUAL REPORT
President's Message
Dear Investor:
I am pleased to present the Semi-Annual Report for Federated U.S. Government
Bond Fund. The Report covers the six-month reporting period ended February 28,
1999 and includes an investment review by the portfolio manager, a complete list
of holdings, and the financial statements.
At the end of the reporting period, U.S. Treasury notes and bonds comprised
77.8% of the fund's portfolio. The remaining holdings consisted of Federal Home
Loan bank securities and a repurchase agreement backed by U.S.
Treasury obligations.
Over the six-month reporting period, the fund paid dividends totaling $0.26 per
share and capital gains totaling $0.23 per share. Due to a decline in the prices
of U.S. Treasuries during the reporting period, the fund produced a slightly
negative total return of (0.71%) 1 for the reporting period. On February 28,
1999, total assets reached $134.4 million.
Thank you for your participation in this quality approach to investment income.
We welcome your questions and comments.
Sincerely,
[Graphic]
Glen R. Johnson
President
April 15, 1999
1 Performance quoted represents past performance and is not indicative 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.
Investment Review
Federated U.S. Government Bond Fund (FUSGBF) invests in U.S. government
securities which include U.S. Treasury and agency obligations. By investment
policy, the fund has been managed within an average duration range of 6 to 10
years.
U.S. Treasury yields significantly declined during the first half of the fund's
semi-annual reporting period as the global economic and financial crisis
worsened and U.S. equity markets declined. The Russian default and devaluation
in mid-August set off a dramatic change in market sentiment toward the avoidance
of credit risk. As a result, the highest quality, most liquid securities
outperformed all others with on-the-run (most recently auctioned) Treasury
securities outperforming off-the-run Treasury securities to a significant
extent. Treasury yields moved sharply lower and long-term Treasury bond yields
fell to their lowest levels in three decades. The 30-year Treasury bond yield
dropped from 5.26% at the end of August 1998 to 4.72% in early October. The fund
took advantage of dramatically wider agency and off-the-run Treasury yield
spreads by increasing exposure to those sectors versus on-the-run Treasuries.
The Federal Reserve Board's (the "Fed") monetary policy bias quickly shifted
from tightening in July to neutral in August to easing in September in response
to disrupted financial markets. The federal funds target rate was lowered three
times from 5.50% to 4.75% by mid-November. The Fed's responsiveness in providing
liquidity calmed the financial markets and reduced the demand for Treasuries as
a safe haven.
After hitting a low in early October, Treasury yields began to rise into the
second half of the fund's reporting period. February 1999 was an especially ugly
month as the Treasury market posted its worst monthly performance since December
1981. Stronger than expected economic data, higher Japanese bond yields, new
Treasury supply through the quarterly refunding, and Fed Chairman Greenspan's
semi-annual Humphrey Hawkins testimony all fueled the bearish bond market
sentiment. Market expectations shifted dramatically from pricing in further Fed
easing during the fourth quarter of 1998 to pricing in the possibility of a Fed
tightening. For the first time since summer 1998, yields along the entire 2- to
30-year Treasury curve rose above 5.00%, reversing the flight to quality gains
caused by the global financial crisis. The 30-year Treasury bond yield ended the
fund's reporting period at 5.58%.
The fund's average duration was shortened below its midpoint when yields fell in
early October and ended the reporting period at 8.20 years. Although the U.S.
economy entered 1999 with considerable momentum, inflation remains subdued and
Fed monetary policy is expected to remain unchanged in the near term. The fund's
net total return for the six months ended February 28, 1999 was (0.71%) 1
compared to (0.14%) for the Merrill Lynch 10-Year Treasury Index and (3.49%) for
the Merrill Lynch 30-Year Treasury Index.2
1 Performance quoted represents past performance and is not indicative 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.
2 The Merrill Lynch 10-Year Treasury Index is an unmanaged index which tracks
the current 10-year Treasury Note. The Merrill Lynch 30-Year Treasury Index is
an unmanaged index which tracks the current 30-year Treasury Bond. These indices
are produced by Merrill Lynch, Pierce, Fenner, & Smith, Inc. Investments cannot
be made in an index.
Effective April 1, 1999 the Merrill Lynch 10+ Year Treasury Index 3 (with a
current duration of just under 11 years) will serve as the fund's new benchmark,
allowing for more complete coverage of the long-term government yield curve. The
average duration of the fund will be managed within 20% of the fund's new
benchmark. As a result, it is likely that the fund will have a longer average
duration than it has maintained historically. Duration measures the price
sensitivity of a fixed income security to changes in interest rates. Interest
rate changes have a greater effect on the price of fixed income securities with
longer durations. Although a longer average duration increases the interest rate
risk of the fund, the total return potential of the fund may also increase.
3 The Merrill Lynch 10+ Year Treasury Index is an unmanaged index which includes
U.S. Treasury securities with maturities of greater than 10 years. The index is
produced by Merrill Lynch, Pierce, Fenner, & Smith, Inc.
Investments cannot be made in an index.
Portfolio of Investments
FEBRUARY 28, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS-91.9%
U.S. TREASURY NOTES AND BONDS-77.8%
$ 3,000,000 11.125%, 8/15/2003 $ 3,678,300
2,000,000 4.750%, 2/15/2004 1,960,940
1,750,000 12.375%, 5/15/2004 2,297,033
2,250,000 7.875%, 11/15/2004 2,524,140
2,000,000 7.500%, 2/15/2005 2,213,640
4,700,000 12.000%, 5/15/2005 6,309,092
1,500,000 6.500%, 8/15/2005 1,588,485
3,000,000 5.875%, 11/15/2005 3,077,520
10,810,000 6.500%, 10/15/2006 11,523,892
3,500,000 6.625%, 5/15/2007 3,774,190
3,000,000 6.125%, 8/15/2007 3,140,040
3,500,000 5.625%, 5/15/2008 3,569,825
2,300,000 12.000%, 8/15/2013 3,357,770
2,000,000 13.250%, 5/15/2014 3,164,000
1,792,000 11.250%, 2/15/2015 2,805,609
1,500,000 7.250%, 5/15/2016 1,730,595
5,300,000 8.875%, 8/15/2017 7,114,296
5,000,000 8.125%, 8/15/2019 6,353,150
7,000,000 8.750%, 8/15/2020 9,475,200
6,700,000 8.000%, 11/15/2021 8,500,960
2,500,000 7.250%, 8/15/2022 2,945,625
3,350,000 6.750%, 8/15/2026 3,788,783
3,875,000 6.375%, 8/15/2027 4,195,695
3,000,000 6.125%, 11/15/2027 3,149,850
2,400,000 5.250%, 2/15/2029 2,292,192
TOTAL 104,530,822
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS-continued
FEDERAL HOME LOAN BANKS-14.1%
$ 1,000,000 6.160%, 10/17/2002 $ 1,022,710
2,000,000 7.590%, 3/10/2005 2,180,840
1,250,000 6.900%, 2/7/2007 1,327,000
2,000,000 5.905%, 3/27/2008 1,995,680
5,500,000 5.925%, 4/9/2008 5,495,600
3,900,000 6.185%, 5/6/2008 3,967,704
3,000,000 5.800%, 9/2/2008 2,983,650
TOTAL 18,973,184
TOTAL U.S. GOVERNMENT OBLIGATIONS
(IDENTIFIED COST $119,804,104) 123,504,006
REPURCHASE AGREEMENT-0.1% 1
165,000 Societe Generale, New York, 4.750%, dated
2/26/1999, due 3/1/1999 (at amortized cost) 165,000
TOTAL INVESTMENTS (IDENTIFIED COST $119,969,104) 2 $ 123,669,006
</TABLE>
1 The repurchase agreement is fully collateralized by U.S. Treasury obligations
based on market prices at the date of the portfolio. The investment in the
repurchase agreement is through participation in a joint accounts with other
Federated funds.
2 The cost of investments for federal tax purposes amounts to $119,969,104. The
net unrealized appreciation of investments on a federal tax basis amounts to
$3,699,902 which is comprised of $5,010,153 appreciation and $1,310,251
depreciation at February 28, 1999.
Note: The categories of investments are shown as a percentage of net assets
($134,391,163) at February 28, 1999.
See Notes which are an integral part of the Financial Statements
Statement of Assets and Liabilities
FEBRUARY 28, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
ASSETS:
Total investments in securities, at value
(identified and tax cost $119,969,104) $ 123,669,006
Cash 31,365
Income receivable 1,625,242
Receivable for shares sold 9,595,370
TOTAL ASSETS 134,920,983
LIABILITIES:
Payable for shares redeemed $ 43,788
Income distribution payable 486,032
TOTAL LIABILITIES 529,820
Net assets for 12,864,199 shares outstanding $ 134,391,163
NET ASSETS CONSIST OF:
Paid in capital $ 130,234,913
Net unrealized appreciation of investments 3,699,902
Accumulated net realized gain on investments 451,052
Undistributed net investment income 5,296
TOTAL NET ASSETS $ 134,391,163
NET ASSET VALUE, OFFERING PRICE AND
REDEMPTION PROCEEDS PER SHARE:
$134,391,163 / 12,864,199 shares outstanding $10.45
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Operations
SIX MONTHS ENDED FEBRUARY 28, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 3,488,127
EXPENSES:
Investment advisory fee $ 372,695
Administrative personnel
and services fee 61,987
Custodian fees 3,727
Transfer and dividend disbursing
agent fees and expenses 26,585
Directors'/Trustees' fees 5,792
Auditing fees 6,878
Legal fees 2,172
Portfolio accounting fees 25,095
Shareholder services fee 155,290
Share registration costs 14,661
Printing and postage 6,516
Insurance premiums 1,448
Miscellaneous 3,983
TOTAL EXPENSES 686,829
WAIVERS:
Waiver of investment advisory fee $ (31,879)
Waiver of shareholder services fee (124,232)
TOTAL WAIVERS (156,111)
Net expenses 530,718
Net investment income 2,957,409
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain on investments 2,057,836
Net change in unrealized appreciation
(depreciation) of investments (5,897,240)
Net realized and unrealized loss on investments (3,839,404)
Change in net assets resulting from operations $ (881,995)
</TABLE>
See Notes which are an integral part of the Financial Statements
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
(unaudited) ENDED
FEBRUARY 28, AUGUST 31,
1999 1998
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income $ 2,957,409 $ 4,646,243
Net realized gain on investments
($2,057,836 and $1,101,995,
respectively, as computed
for federal tax purposes) 2,057,836 1,097,066
Net change in unrealized
appreciation/depreciation (5,897,240) 7,077,402
CHANGE IN NET ASSETS RESULTING
FROM OPERATIONS (881,995) 12,820,711
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net
investment income (2,957,409) (4,648,738)
Distributions from net
realized gains (2,523,976) (2,169,264)
CHANGE IN NET ASSETS RESULTING
FROM DISTRIBUTIONS TO SHAREHOLDERS (5,481,385) (6,818,002)
SHARE TRANSACTIONS:
Proceeds from sale of shares 89,242,543 96,031,789
Net asset value of shares issued
to shareholders in payment of
distributions declared 3,120,329 3,599,762
Cost of shares redeemed (68,312,374) (57,571,361)
CHANGE IN NET ASSETS RESULTING
FROM SHARE TRANSACTIONS 24,050,498 42,060,190
Change in net assets 17,687,118 48,062,899
NET ASSETS:
Beginning of period 116,704,045 68,641,146
End of period $ 134,391,163 $ 116,704,045
</TABLE>
See Notes which are an integral part of the Financial Statements
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
(unaudited)
FEBRUARY 28, YEAR ENDED AUGUST 31,
1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $11.00 $10.30 $ 9.94 $10.45 $ 9.72 $11.04
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.26 0.56 0.60 0.60 0.60 0.54
Net realized and
unrealized gain (loss)
on investments (0.32) 1.01 0.48 (0.43) 0.73 (1.09)
TOTAL FROM
INVESTMENT OPERATIONS (0.06) 1.57 1.08 0.17 1.33 (0.55)
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.26) (0.56) (0.60) (0.60) (0.60) (0.54)
Distributions from net
realized gain on
investments (0.23) (0.31) (0.12) (0.08) - (0.23)
TOTAL DISTRIBUTIONS (0.49) (0.87) (0.72) (0.68) (0.60) (0.77)
NET ASSET VALUE,
END OF PERIOD $10.45 $11.00 $10.30 $ 9.94 $10.45 $ 9.72
TOTAL RETURN 1 (0.71%) 15.94% 11.13% 1.37% 14.34% (5.23%)
RATIOS TO AVERAGE
NET ASSETS:
Expenses 0.85% 2 0.85% 0.85% 0.85% 0.85% 0.83%
Net investment income 4.76% 2 5.29% 5.85% 5.71% 6.10% 5.25%
Expense waiver/
reimbursement 3 0.25% 2 0.33% 0.36% 0.31% 0.22% 0.17%
SUPPLEMENTAL DATA:
Net assets, end of period
(000 omitted) $134,391 $116,704 $68,641 $84,806 $124,696 $138,016
Portfolio turnover 11% 67% 90% 53% 37% 22%
</TABLE>
1 Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
2 Computed on an annualized basis.
3 This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
See Notes which are an integral part of the Financial Statements
Notes to Financial Statements
FEBRUARY 28, 1999 (UNAUDITED)
ORGANIZATION
Federated U.S. Government Bond Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended (the "Act") as an open-end,
management investment company. The investment objective of the Fund is to pursue
total return.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS
U.S. government securities, are generally valued at the mean of the latest bid
and asked price as furnished by an independent pricing service. Short- term
securities are valued at the prices provided by an independent pricing service.
However, short-term securities with remaining maturities of 60 days or less at
the time of purchase may be valued at amortized cost, which approximates fair
market value.
REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take possession,
to have legally segregated in the Federal Reserve Book Entry System, or to have
segregated within the custodian bank's vault, all securities held as collateral
under repurchase agreement transactions. Additionally, procedures have been
established by the Fund to monitor, on a daily basis, the market value of each
repurchase agreement's collateral to ensure that the value of collateral at
least equals the repurchase price to be paid under the repurchase agreement
transaction.
The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the "Trustees").
Risks may arise from the potential inability of counterparties to honor the
terms of the repurchase agreement. Accordingly, the Fund could receive less than
the repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Interest income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code"). Distributions to shareholders are recorded on the ex- dividend
date.
FEDERAL TAXES
It is the Fund's policy to comply with the provisions of the Code applicable to
regulated investment companies and to distribute to shareholders each year
substantially all of its income. Accordingly, no provisions for federal tax are
necessary.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may engage in when-issued or delayed delivery transactions. The Fund
records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when- issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts of assets, liabilities, expenses and revenues reported in the
financial statements. Actual results could differ from those estimated.
OTHER
Investment transactions are accounted for on the trade date.
CAPITAL STOCK
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in shares were as follows:
SIX MONTHS YEAR
ENDED ENDED
FEBRUARY 28, AUGUST 31,
1999 1998
Shares sold 8,161,063 9,041,298
Shares issued to shareholders
in payment of distributions
declared 281,862 339,760
Shares redeemed (6,189,261) (5,436,280)
NET CHANGE RESULTING
FROM SHARE TRANSACTIONS 2,253,664 3,944,778
INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE
Federated Management, the Fund's investment adviser (the "Adviser"), receives
for its services an annual investment advisory fee equal to 0.60% of the Fund's
average daily net assets. The Adviser may voluntarily choose to waive any
portion of its fee. The Adviser can modify or terminate this voluntary waiver at
any time at its sole discretion.
ADMINISTRATIVE FEE
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The fee
paid to FServ is based on the level of average aggregate daily net assets of all
funds advised by subsidiaries of Federated Investors, Inc. for the period. The
administrative fee received during the period of the Administrative Services
Agreement shall be at least $125,000 per portfolio and $30,000 per each
additional class of shares.
SHAREHOLDER SERVICES FEE
Under the terms of a Shareholder Services Agreement with Federated Shareholder
Services Company ("FSSC"), the Fund will pay FSSC up to 0.25% of average daily
net assets of the Fund for the period. The fee paid to FSSC is used to finance
certain services for shareholders and to maintain shareholder accounts. FSSC may
voluntarily choose to waive any portion of its fee. FSSC can modify or terminate
this voluntary waiver at any time at its sole discretion.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES
FServ, through its subsidiary FSSC, serves as transfer and dividend disbursing
agent for the Fund. The fee paid to FSSC is based on the size, type, and number
of accounts and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES
FServ maintains the Fund's accounting records for which it receives a fee. The
fee is based on the level of the Fund's average daily net assets for the period,
plus out-of-pocket expenses.
GENERAL
Certain of the Officers and Trustees of the Corporation are Officers and
Directors or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
period ended February 28, 1999, were as follows:
Purchases $ 18,284,836
Sales $ 12,604,176
YEAR 2000
Similar to other financial organizations, the Fund could be adversely affected
if the computer systems used by the Fund's service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. The Fund's Adviser and Administrator are taking measures that they
believe are reasonably designed to address the Year 2000 issue with respect to
computer systems that they use and to obtain reasonable assurances that
comparable steps are being taken by each of the Fund's other service providers.
At this time, however, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund.
SUBSEQUENT EVENT
The Fund's Investment Adviser is Federated Investment Management Company
("Adviser"). Effective March 31, 1999, Federated Management, Adviser to
the Fund, merged into Federated Investment Management Company (formerly,
Federated Advisers).
Trustees
JOHN F. DONAHUE
THOMAS G. BIGLEY
JOHN T. CONROY, JR.
WILLIAM J. COPELAND
LAWRENCE D. ELLIS, M.D.
PETER E. MADDEN
CHARLES F. MANSFIELD, JR.
JOHN E. MURRAY, JR., J.D., S.J.D.
MARJORIE P. SMUTS
JOHN S. WALSH
Officers
JOHN F. DONAHUE
Chairman
GLEN R. JOHNSON
President
J. CHRISTOPHER DONAHUE
Executive Vice President
EDWARD C. GONZALES
Executive Vice President
JOHN W. MCGONIGLE
Executive Vice President, Treasurer and Secretary
RICHARD B. FISHER
Vice President
KAREN M. BROWNLEE
Assistant Secretary
Mutual funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in mutual funds involves investment risk,
including the possible loss of principal.
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the fund's prospectus which contains facts concerning
its objective and policies, management fees, expenses, and other information.
[Graphic]
Federated
World-Class Investment Manager
SEMI-ANNUAL REPORT
Federated U.S. Government Bond Fund
SEMI-ANNUAL REPORT
TO SHAREHOLDERS
FEBRUARY 28, 1999
[Graphic]
Federated
Federated U.S. Government Bond Fund
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
1-800-341-7400
WWW.FEDERATEDINVESTORS.COM
Federated Securities Corp., Distributor
Cusip 314284100
8040402 (4/99)
[Graphic]
