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    Quarterly Fund Commentary

    Ivy Municipal Bond Fund (prospectus)
    March 31, 2016

    Bryan J. Bailey, CFA

    Market Sector Update

    • Municipal market performance was primarily driven by an extreme supply/demand imbalance, as heavy investor demand (retail, institutional, and even foreign) far outstripped paltry supply.
    • Defaults in the municipal bond asset class continue to be rare. While we anticipate increased headline risk from municipal issuers that have severely under-funded pensions and other post-retirement benefit obligations, 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 and legislative noise.
    • At this juncture it appears that the Puerto Rico situation has been walled off from the investment-grade municipal bond market. All news, be it positive or negative, has had very little impact on the investment-grade market.
    • The municipal yield curve flattened slightly in the quarter.

    Portfolio Strategy

    • Interest rates decreased, with the exception of the one-year sport rate. Heavy investor demand and persistent investment flows into the space far outstripped supply.
    • While we expect U.S. gross domestic product to grow at a respectable level, investors appear to be concerned that problems in the rest of the world will be a drag on U.S. growth and result in renewed dollar strength and a potential deflationary spiral.
    • Europe, China and Japan continue to run very stimulative monetary policy operations, which could continue to prevent U.S. rates from rising too far, even if the U.S. Fed is beginning to tighten policy. Geopolitical risk continues to elevate the potential for additional flightto- quality investments.
    • 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 slightly short 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.


    • 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. The Fund currently has no exposure to Puerto Rico credits.
    • 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 market as we move into 2Q 2016. Supply/demand technicals will continue to play a very important role in relative performance.
    • While it's plausible that the bull market in bonds might be over, we don't believe an outright bear market is beginning. Global central banks appear determined to keep rates artificially low. They continue to express concern that growth may not be sustainable if rates were to move higher. The inflation/deflation argument and geopolitical turmoil will continue to impact the market.


    The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 2016. 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 not a guarantee of future results.

    Diversification is an investment strategy that attempts to manage risk within your portfolio but does not guarantee profits or protect against loss in declining markets.

    Risk factors. The value of the Fund's shares will change, and you could lose money by investing. 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. Investing in below-investment-grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may include a significant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax (AMT). Exempt-interest dividends the Fund pays may be subject to state and local income taxes. The portion of the dividends the Fund pays that is attributable to interest earned on U.S. government securities generally is not subject to those taxes, although distributions by the Fund to its shareholders of net realized gains on the sale of those securities are fully subject to those taxes. The municipal securities market generally, or certain municipal securities in particular, may be significantly affected by adverse political, legislative or regulatory changes or litigation at the Federal or state level. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

    IVY INVESTMENTS ? refers to the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds, and those financial services offered by its affiliates.

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