Waddell & Reed

Quarterly Fund Commentary


Ivy Limited-Term Bond Fund (prospectus)
September 30, 2014


Manager(s):
Mark J. Otterstrom, CFA
Susan K. Regan

Market Sector Update

  • The U.S. economic rebound witnessed in the Q2 continued into Q3. Third quarter growth is widely expected to be around 3.5%.
  • While the yield on the 10-year U.S. Treasury ended the quarter near where it started, we saw continued volatility in long Treasury rates.
  • The International Monetary Fund (IMF) has significantly lowered its global growth projections for the next year. The better economic growth in the U.S., while still rather anemic, is one of the few bright spots in their forecasts.
  • Global weakness has led to an increased flight to quality trade and helped lower the yields on the long end of the Treasury curve. The strength in our domestic economy and improvement to our jobs market has led the Federal Reserve (Fed) to contemplate raising U.S. short-term interest rates in 2015. While the 10-year Treasury has rallied nearly 65 basis points year to date, the yield on the two-year Treasury has sold off nearly 15 basis points. The dynamics leading to this flatter yield curve should be with us well into next year, in our opinion.

 

Portfolio Strategy

  • In our view, the market is very data dependent, and right now it is showing little conviction in either direction. Yields appear to be at the low end of a recent volatile trading range. It does not take much news for the market to make a significant move to higher or lower rates.
  • 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. With economic conditions improving in the U.S., we could see a continued narrowing of corporate bond spreads.
  • 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 low volatility environment, moreover, we expect MBS to outperform Treasury securities through the end of the year. 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 seeking 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. 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.
  • We anticipate relatively stable economic growth for the remainder of 2014, led by both consumer and business spending.
  • While the Fed still appears to be willing to keep rates low for a long time, they have indicated a growing desire to begin to normalize monetary policy next year. They have indicated the risk of higher inflation is less of a concern than the threat of renewed economic weakness. Many of the downside risks to the domestic economy that were present in 2013 have been abating throughout this year.
  • While we still expect some fiscal tightening, we are not facing another fiscal cliff from forced sequestration. For the first time in years, we have a multi-year budget deal out of Washington that should help to remove a major headwind from the economy.

 


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

Risk factors. The opinions expressed in this commentary are those of the Portfolio's manager and are current through September 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.

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