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    Quarterly Fund Commentary


    Ivy Bond Fund (prospectus)
    June 30, 2016


    Manager(s):
    Chris Sebald, CFA
    David Land, CFA
    Thomas Houghton, CFA

    Market Sector Update

    • Brexit - or the United Kingdom’s decision to leave the European Union (EU) - was the most significant event in the quarter. It opens up major new pathways for political change, market reactions and central bank actions that hadn’t been considered.
    • Interest rates fell at every major maturity point in the quarter. Longer maturity bonds fell the most, with 30-year Treasury yields falling over 30 basis points (bps). Long term yields have fallen nearly 75 bps since the beginning of the year.
    • Corporate bond and other nongovernment bond spreads narrowed as the markets recovered from the firstquarter correction. Strong demand from U.S. institutional and retail investors, along with the European Central Bank’s (ECB) bond buying programs continue to provide steady buying.
    • As European bond yields headed back toward record low levels, they dragged U.S. bond yields with them. The Brexit vote exacerbated the move lower in yields, as it is sure to be accompanied by central banks boosting monetary policy measures to support the U.K. and Europe during the breakup.
    • Discussion of further rate increases in the U.S. Federal Reserve Funds (Fed) rate were dashed because of Brexit and the potential for fallout in other European countries. U.S. Fed officials increasingly take into account global macro factors in setting interest rates in the U.S.
    • Excess returns for most non-government bond sectors were positive in the quarter despite the late quarter setback, which caused spreads to widen in the last week of the month.

    Portfolio Strategy

    • We added to the Fund’s corporate bond exposure during the quarter. In particular we found value in new and secondary bonds of electric utility and communications companies. These sectors are primarily domestic and consumer-focused and we expect these sectors will perform better, relative to other sectors that are more cyclical and internationally exposed. We reduced exposure to the banking sector due to concerns about the impact on profitability in a low and declining interest rate environment.
    • We reduced exposure to agency mortgage-backed securities, since falling rates could cause prepayment speeds to increase on residential mortgages and lead to underperformance in the sector.
    • We added exposure to longer dated Treasuries and corporates, as we believe the downward pressure on yields will continue.

    Outlook

    • Politics will become more important to markets than the economy in the near term. The EU can’t afford another of the remaining three key members to leave and expect to keep the union or the currency intact.
    • We expect the Bank of England to lower short term rates and to see more quantitative easing by the European Central Bank and Bank of Japan. Investors don’t think the Fed will raise interest rates before 2017 at this point. While this may be a passionate reaction to recent events, we believe that a Fed rate hike is off the table for the remainder of this year.
    • U.S. bond yields could go even lower. While long-term U.S. yields are already near all-time lows, the U.S. market looks attractive compared to negative yields in Europe and Asia. Corporate bond spreads, while immediately rising in reaction to the Brexit vote, are likely to narrow in the medium term. European and Japanese investors are likely to return to the safety and yield of the U.S. bond market over the coming quarters as their markets offer little if any positive-yielding bonds. Despite very low yields it is hard not to be bullish on U.S. bonds.
    • Despite the anticipated market reactions, we don’t view Brexit as a catastrophic event for markets. The biggest risk is whether this vote reignites broader concerns over the political commitment of France and Italy to remain in the EU. Brexit could serve to accelerate concerns over a potential breakup of the union and the end of the euro, should another key member country consider leaving.

    The opinions expressed in this commentary are those of the Fund’s managers and are current through June 30, 2016. The managers’ 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.

    Risk factors. 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. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. 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 INVESTMENTSSM 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.

    Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a mutual fund. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from a financial advisor or at www.ivyinvestments.com. Read it carefully before investing.

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