Waddell & Reed

Quarterly Fund Commentary

Ivy Municipal Bond Fund (prospectus)
March 31, 2015

Bryan J. Bailey, CFA

Market Sector Update

  • Municipal market performance was primarily driven by a substantial increase in new issue volume, which caught the market somewhat off-guard. Issuers flooded the market with refunding deals in an attempt to get in front of anticipated rate increases. Municipals significantly underperformed Treasuries in the quarter.
  • Defaults in the municipal bond asset class continue to be rare. While we anticipate increased headline risk from municipal issuers that have experienced severe stress and deterioration for many years, we continue to believe that these problems are not systemic, and that they will remain isolated.
  • All Puerto Rican credits continue to be pressured, with many trading at expected post-default recovery levels. There is a high level of headline risk, restructuring opinions, legislative noise and rating agency downgrades that will continue to keep these credits depressed.
  • The municipal yield curve flattened slightly in the quarter. Extreme underperformance was observed in the intermediate to long-intermediate portion of the curve as a result of the heavy refunding volume.
  • Municipal bonds with maturities of 10 years and longer currently yield more than Treasuries. This is extremely rare and we believe presents a very attractive relative value opportunity for investors.

Portfolio Strategy

  • Short rates increased slightly in anticipation of the expected Fed tightening schedule, while rates on most other maturities declined, with the exception of intermediate and longintermediate rates that were negatively impacted by the excessive refunding volume. While we expect U.S. gross domestic product to grow at a respectable level over the rest of the year, investors appear to be concerned that the rest of the world will continue to produce anemic growth, which will eventually drag the U.S. down, and could create a deflationary spiral.
  • Europe has begun quantitative easing (QE), while China and Japan continue to run very stimulative monetary policy operations. This has driven other developed market yields down to paltry levels which has essentially put a ceiling on U.S. Treasury rates.
  • Treasury and municipal rates are still extremely low by all historical standards. We remain very cautious as we believe that interest rates will need to normalize at some point in time. The portfolio duration is currently neutral to our benchmark. We continue to maintain our overweight slant to spread product in the A-BBB range.
  • We will continue to place emphasis on diversification, higher (overall) credit quality and yield curve positioning.
  • As always, the Fund will actively seek to uncover relative value opportunities between states, sectors and security structures while also attempting to exploit opportunities presented by the shape and slope of the yield curve.


  • We remain confident that municipal bond defaults will continue to be much lower than any other fixed-income alternatives, besides U.S. Treasuries.
  • We will continue to monitor the situation in Puerto Rico, but we do not believe that there will be any spillover into other parts of the investment grade market, regardless of the outcome. We expect the Puerto Rico situation to be be isolated.
  • We do not anticipate any far-reaching tax code overhaul that would alter municipal bond tax exemptions. We expect to see continued headlines on municipal pension underfunding and other retirement benefits issues. We will remain vigilant in monitoring these situations and we will endeavor to avoid investments with these issuers.
  • We expect Treasury yields to be the primary driver of the investment-grade municipal bond market as we move into Q2 2015. Demand technicals will continue to play a very important role in relative performance.
  • While it is certainly plausible that the long-running bull market in bonds might be over, we do not believe that an outright bear market is beginning. Global central banks appear determined to keep interest rates artificially low. They continue to express concern that growth may not be sustainable if rates were to move higher. These policies could keep rates low for a longer period of time than many expect, and we are concerned that there will potentially be painful, unintended consequences.


The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 2015. The manager’s views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results.

Risk factors. As with any mutual fund, the value of the Fund’s shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fixed-income securities are subject to interest-rate risk and, as such, the net asset value of the Fund may fall as interest rates rise. The Fund may include a signif cant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax. These and other i risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus, or if available a summary prospectus, containing this and other information for the Ivy Funds, call your financial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully before investing.

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