Quarterly Fund Commentary
Ivy Limited-Term Bond Fund
March 31, 2014
Mark J. Otterstrom, CFA
Market Sector Update
- We saw a surprisingly strong Treasury bond market during the first quarter, with the 10-year rallying nearly 30 basis points. The March employment report reinforced the idea that the labor market still contains considerable slack and extraordinary accommodation will be around for some time to come.
- The Federal Reserve has continued to taper its quantitative easing program. While the March non-farm payroll numbers were not as strong as the bond market anticipated, it appears to be strong enough to allow the Fed to continue its current tapering trajectory.
- We have seen a renewed flight to quality bid in the long end of the Treasury market due to the increased uncertainty worldwide. The Treasury market will have a hard time maintaining a sustained sell-off in the existing global economic framework.
- Over the first quarter we witnessed a significant flattening of the Treasury yield curve. The short end of the curve remained fairly stable while the longer end of the curve rallied 30-35 basis points. Due to the improved economic conditions in the U.S. over the last few months, lower-rated bonds have outperformed very highly rated debt as investors have an increased willingness to take on more risk in their portfolios.
- We have been overweight corporates over the last few years and will continue this overweight position into 2014. With economic conditions improving in the U.S. we could see continued narrowing of corporate bond spreads.
- Our mortgage holdings are structured with a goal of experiencing less extension risk during periods of rising interest rates. Agency mortgage bonds provide a stable source of income for the portfolio. We continue to look for opportunities to increase our agency mortgage bond exposure. We remain underweight Treasury bonds, especially at the very short end of the curve, and overweight high-grade spread product. We are committed to seeking stable income at the best available price.
- 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 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 should see continued volatility in the middle and longer end of the curve. Slight changes in the U.S. economic outlook can have significant shortterm effects on longer duration securities.
- External risks to the Treasury bond market include weakness in China and the emerging markets, geopolitical risk emanating from the Ukraine, as well as the unknown costs associated with the implementation of the Affordable Care Act.
- 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 will remain short our benchmark duration going into the second quarter of 2014. 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 March 31, 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 fund, the value of the Portfolio's shares will change, and you could lose money on your investment. An investment in the Portfolio 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 Portfolio may fall as interest rate rise. These and other risks are more fully described in the Portfolio'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.