Quarterly Fund Commentary
Ivy Municipal Bond Fund
September 30, 2014
Bryan J. Bailey, CFA
Market Sector Update
- Municipal market performance was
primarily driven by a severe bond
- 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 (Detroit and Puerto Rico), we
continue to believe that these problems
are not systemic, and that they will
- 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
modestly in the quarter, but it is still very
- While rates declined marginally in Q3 we
do not expect this to be the start of a new
bull market trend. The weak, weatherrelated,
Q1 economic data has already
been reversed with a very strong snap
back in Q2. However, recently reported
inconsistent U.S. economic data,
heightened geopolitical risks, a
European recession, and now the Ebola
scare, have made us uncertain as to the
timing of a move to higher interest rates.
The Fund is positioned with a neutral
level of interest rate sensitivity versus our
benchmark and is holding a significant
- 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 approx. 20%
shorter than one year ago, because of
re-balancing. 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 Puerto
Rico Public Corporation Debt
Enhancement and Recovery Act, the
pending U.S. Constitutional
challenges to the Act, and any
subsequent spill-over into the overall
municipal bond market.
- This year's congressional elections
weaken chances of a far-reaching tax
code overhaul that would roll back or
alter municipal bond's tax exemption.
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
through 2014. 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 are not convinced
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,
The opinions expressed in this commentary are those of the Fund’s manager and are current through September 30, 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.