Quarterly Fund Commentary
Ivy Limited-Term Bond Fund
September 30, 2013
Mark J. Otterstrom, CFA
Market Sector Update
- The dysfunction coming out of Washington, D.C. continues to negatively impact the bond market. Treasury markets have seen a very volatile trading pattern over the last three months. Recent employment data has signaled a slightly improving jobs market and some leading economic indicators point to a muted but growing economy.
- The Federal Reserve’s (Fed) efforts to be more transparent have added to market volatility. The bond market rallied on the Fed’s surprise decision to not reduce its bond purchases in September. The Fed may still decide to begin tapering later this year. If it does, we could test the highs in yields seen earlier this year.
- The increased market volatility and the push by investors to shed duration within their portfolios led to increased selling of longer duration, high quality corporate debt. This spread widening was caused by a liquidity event, not a credit event. Increased selling resulted in a higher yield premium being demanded by those willing to add duration to their portfolios.
- Corporate balance sheets remain strong and quarterly earnings, for most corporate issuers, remained very healthy over the last quarter. We believe credit quality within the investment-grade corporate bond sector remains very good.
- Investment-grade corporate bonds outperformed Treasuries earlier in the quarter as selling pressures within the markets began to subside. We maintained our overweight positions in corporate debt during the selloff last quarter and benefited from a much stronger bid for bonds this quarter.
- We continue to be underweight agency debentures. Uncertainty brought on by the Fed’s about-face on tapering and the federal budget fiasco has led to these bonds underperforming over the last few months.
- Our mortgage holdings are structured to experience less extension risk during periods of rising interest rates. We believe holdings have performed relatively well given the sharp rise in the 10-year part of the yield curve.
- 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 seek stable income at the best available price.
- The outlook for the next three months is being clouded by the political brawl taking place in Washington. We believe that Congress and the White House are playing with fire when they threaten the country’s sovereign debt.
- Regardless of the outcome, the political game of chicken will have detrimental effects to our economy. While we are currently short our benchmark duration, this position can be changed quickly if events in Washington begin to slow our economic growth significantly.
- In the past, sustained bond bear markets have not been able to get underway until the Fed tightening cycle was imminent. We have lowered our exposure to duration risk. We will remain short our benchmark duration going into year end. 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 Fund’s manager and are current through Sept. 30, 2013. 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.