Waddell & Reed

Quarterly Fund Commentary


Ivy Bond Fund (prospectus)
June 30, 2014


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

Market Sector Update

  • After a surprisingly weak first quarter, the U.S. economy witnessed a significant recovery over the second quarter. For growth to be sustainable, increased business activity and hiring needs to translate into increased wages and consumer spending. This needs to be the next big step forward for the economy.
  • We believe that most inflation measures have seen their low point. Most are near the Federal Reserve’s (Fed) inflation target of 2%, with the exception of personal consumption expenditures (PCE), which is the Fed’s preferred measure for inflation. If PCE reaches the 2% level, we believe the Fed will come under increasing pressure to begin raising short-term interest rates.
  • The Fed has continued to taper securities purchases through its quantitative easing policy, and the tapering process is expected to be completed by this fall. We also expect the Fed to begin shrinking its balance sheet by not reinvesting the cash flow generated by its current security holdings.

 

Portfolio Strategy

  • Over the last three months the 10-year Treasury bond has traded in a relatively tight range, between a 2.70% and a 2.50% yield. We believe the market is very data dependent, and right now it is showing little conviction in either direction.
  • We think investment-grade corporate credit offers the best risk-adjusted spread cushion of the major sectors in the high-grade fixed income market. We have been overweight corporates over the last few years and plan to continue this overweight position as 2014 progresses.
  • Net new issuance of mortgage-backed securities (MBS) has fallen sharply since the first of the year, more than offsetting the impact from the Fed’s taper. In the current environment, we expect MBS to continue outperforming Treasury securities.
  • Our mortgage holdings are structured to experience less extension risk during periods of rising interest rates. Also, agency mortgage bonds provide a stable source of income for the portfolio, and we continue to look for opportunities to increase agency holdings.
  • We remain underweight Treasury bonds, especially at the very short end of the curve, and overweight high-grade spread product. We are committed to seek stable income at the best available price.

 

Outlook

  • The Fed has reiterated its intention to keep the fed funds rate near zero for an extended period of time. Currently, the market does not anticipate the Fed to begin raising the Fed funds rate until early to mid-2015. However, this is a very volatile and data-dependent prediction.
  • With the short end of the yield curve anchored by the low fed funds rate, we expect to see continued volatility in the middle and longer end of the curve. Even slight changes in the U.S. economic outlook can have significant short-term effects on longer duration securities. Assuming continued improvement in the U.S. employment picture, a less volatile fiscal policy environment and steady improvement in housing, we anticipate more sustainable economic growth for the remainder of 2014, led by both consumer and business spending.
  • In the past, sustained bond bear markets have not been able to get underway until the Fed tightening cycle is imminent. We have lowered our exposure to duration risk, and expect to remain short our benchmark duration going into the third quarter of 2014. We anticipate continued demand for spread product within the high-grade bond market. We are willing to take additional credit risk when we believe we are being compensated to do so.

 


The opinions expressed in this commentary are those of the Portfolio’s manager and are current through June 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.

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.

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 rate rise. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.

Variable investment options are subject to market risk, including loss of principal, and are suitable for long-term investing, particularly for retirement. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 ½ may be subject to a 10 percent IRS penalty in addition to taxes. Ivy Funds VIP are only available as investment options in variable life insurance policies and variable annuity contracts issued by participating insurance companies. They are not offered or made available directly to the public.

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