Quarterly Fund Commentary
Thomas Houghton, CFA
David Land, CFA
Chris Sebald, CFA
Market Sector Update
- Policymakers took center stage again in
the third quarter, with the Federal Reserve
(Fed) and federal government
significantly influencing the outlook for
fourth quarter and beyond.
- The economy showed signs of slightly
higher growth. Employment improved,
with jobs showing steady gains and
unemployment claims dropping to a
post-recession low. The fact that fewer
working age-eligible people are
choosing to work, reducing the labor
force participation rate to a 35-year low,
however, takes the shine off what
otherwise would be strong employment
- We noted earlier this year that over the
four years of this recovery, simultaneous
improvement in housing, business
sentiment and employment has been
rare. It finally occurred in the first half of
2013, but was derailed all too soon by
the Fed’s suggestion that quantitative
easing might be withdrawn.
- The 10-year Treasury yield rose to nearly
3%, a level not seen since mid-2011.
Housing indicators stalled, and the Fed
backed off from slowing its bond-buying
program when it saw the first signs that
a change in the program could cool the
- As the third quarter closed, a
government shutdown seemed
inevitable, and a redo of the 2011 debt
ceiling debate appeared likely. Interest
rates and stocks were falling as the
- We made some shifts in the Fund,
adding financials, especially banks and
insurance company bonds, as well as
agency mortgage-backed securities
(MBS). We sold industrials.
- We expect agency MBS to do well. The
Fed’s bond-buying program continues
to focus on MBS, and the outstanding
supply of mortgages is dwindling in the
higher mortgage rate environment.
- Although we sold industrial bonds, we
purchased very attractive bonds that
were part of a telecommunications
megadeal. Those bonds now make up
about 1% of the Fund. We sold other
high-quality industrials with lower yield
spreads to make room for the
- The outlook is murkier than it has been
for some time. The Fed and federal
government are mostly to blame, but
our larger concern is that the economy
lacks the momentum to maintain
growth of 2.5 percent when faced with
headwinds of potentially higher interest
rates and a debt ceiling battle.
- While we think interest rates are likely
to rise in the longer term as the
economy improves, we expect any
near term rise to remain limited.
- We are taking a more cautious
approach in the Fund, reducing
exposure to high-yield bonds and
other corporate sectors. We are
increasing agency MBS and Treasuries
as we head into the fourth quarter.
The opinions expressed in this commentary are those of the Fund’s managers and are current through Sept. 30, 2013. 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 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 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.
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.