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    Quarterly Fund Commentary

    Ivy Limited-Term Bond Fund (prospectus)
    March 31, 2016

    Susan K. Regan

    Market Sector Update

    • January was characterized by falling oil and equity prices, and widening credit spreads, especially high-yield and BBBrated credit and everything related to energy and commodities. The news in energy fueled a flight-to-quality in the U.S. Treasury market.
    • Compared with the first two months of the year, March saw less volatility. As fears of deflation and an economic downturn faded, several markets showed signs of recovery and a more stable fixed income environment. The recovery in energyrelated credit resulted in spreads in that sector which were tighter at the quarter’s end than at the beginning. Oil ended the quarter over $38 per barrel. The yield on the 10-Year Treasury note rose in March to end the quarter at 1.77%, up 11 basis points, or bps (0.11 percent), from its February low, but down 50 bps (0.50 percent) from year-end 2015.

    Portfolio Strategy

    • The Fund’s duration is roughly the same as the benchmark. The Federal Open Market Committee (FOMC) has lowered their expectation for potential rate increases in 2016 from four to two. Federal Reserve (Fed) Chair Janet Yellen in March gave the markets reason to believe the Fed will be very slow to raise rates. It is possible the Fed will raise rates again in June, but only after seeing multiple data sources. The uncertainty regarding both the path of interest rates and the speed of rate hikes gives us reason to keep the Fund's duration very close to that of the benchmark.
    • The slight barbell strategy begun in late 2014 remains in place, as we are overweight in the 0-3 year part of the curve, are underweight in the 3-5 year curve and have a small allocation to maturities in the 5-10 year range.
    • The issuance of corporate bonds has continued to be attractive. Investment grade issuance for the quarter was $364.7 billion. Demand continues to be strong as investors here and worldwide are trying to find yield. We have reduced our credit exposure gradually the last several quarters and feel very good about the corporate bonds in the portfolio. We took advantage of the spread widening early in the quarter and added a few short maturity bonds.


    • While the Fed engaged in a 25 bps (0.25 percent) interest rate hike in December, an increasing number of countries are witnessing negative interest rates. Europe has negative interest rates in many of its government bond markets, and the Bank of Japan adopted a negative interest rate program in late January of this year. Foreign investors have been buying both U.S. Treasuries and investment-grade U.S. corporate bonds. This may help the performance of both asset classes in the coming months.
    • In both 2014 and 2015, first quarter GDP was weak, partially attributed to harsh winters in some parts of the country. First quarter 2016 GDP, which will be released in late April, is expected to be around 1 percent to 1.2 percent.
    • We have seen some inflation in the wage data recently. The Fed will be watching to see if that continues and if it spills over into more of the economy. Deflation can pose as much or more of a threat than inflation.
    • This low-growth and low-inflation environment we are in gives the Fed reason to be very cautious about the pace of rate hikes. The uncertainty in the world gives the Fed reason to move slowly and should continue to provide a good performance environment for this shortduration bond fund.

    The opinions expressed in this commentary are those of the Fund's manager and are current through March 31, 2016. The manager's view is subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is not a guarantee of future results.

    Risk factors. As with any 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. These and other risks are more fully described in the Fund's prospectus.

    IVY INVESTMENTS? refers to the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds, and those financial services offered by its affiliates.

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