Waddell & Reed

Quarterly Fund Commentary

Ivy Municipal Bond Fund (prospectus)
December 31, 2014

Bryan J. Bailey, CFA

Market Sector Update

  • Municipal market performance was primarily driven by a global riskoff/ relative-yield advantage trade which continued to drive Treasury bond yields lower. Municipal bonds underperformed Treasuries as new issue supply increased heading into year-end.
  • 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.
  • Puerto Rico's passage of the Public Corporation Debt Enforcement and Recovery Act, as well as the hiring of a restructuring consultant by the Puerto Rico Power Authority, has introduced a new layer of risk and uncertainty that needs to be monitored closely.
  • The municipal yield curve flattened aggressively in the quarter, as the market began to price-in clearer expectations of the Federal Reserve's (Fed) anticipated 2015 tightening schedule.

Portfolio Strategy

  • Short rates increased in anticipation of the expected Fed tightening schedule, while longer rates continued to decline. U.S. gross domestic product continues to grow at a respectable level, but 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. Expectations of quantitative easing actions by the European Central Bank have 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. While the portfolio duration is currently neutral relative to the benchmark, the benchmark duration is approximately 25% shorter than one year ago, because of re-balancing.
  • 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 Puerto Rico Public Corporation Debt Enhancement and Recovery Act, the pending constitutional challenges to the Act, and any subsequent spillover into the overall municipal bond market.
  • We do not anticipate any far-reaching tax code overhaul that would roll back or alter municipal bond tax exemptions. We also expect negative headlines from old municipal bankruptcy cases working their way through the court systems and decisions influencing the actions of other struggling municipalities in the future.
  • We expect Treasury yields to be the primary driver of the investment-grade municipal bond market as we move into 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 December 31, 2014. 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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