Waddell & Reed

Quarterly Fund Commentary


Ivy Limited-Term Bond Fund (prospectus)
March 31, 2013


Manager(s):
Mark J. Otterstrom, CFA

Market Sector Update

  • We continued to see significant volatility within to long end of the Treasury market. After starting the year near a 1.75%, by mid-March the yield on the 10-year Treasury bond reached 2.06%, testing the 12 month high. A similar pattern occurred with the 30-year which began the year at a 2.95% and increased to a 3.26 by mid-March. Both benchmarks saw a significant decline in rates at the end of the quarter.
  • Following a surprisingly strong jobs report for February and early signs to a stronger than expected U.S. consumer, expectations for growth began to be ratcheted up by many market observers. These expectations faded by the end of March, culminated by a very disappointing jobs report for March.
  • Also adding fuel to the recent rally in the Treasury market was the renewed turbulence in the Eurozone. In March the Eurozone composite purchasing managers index (PMI) declined to 46.5 and retail PMI declined to 43.3. The Eurozone unemployment rate increased to a record 12% for February.
  • The banking crisis in Cyprus reinforced the flight to quality trade into Treasuries this quarter. In addition to this increased uncertainty overseas, the Fed continues to be an aggressive buyer of both Treasury bonds and agency mortgagebacked securities (MBS).


Portfolio Strategy

  • Investment grade corporate bonds underperformed Treasuries over the last month of the quarter. Credit spreads on these bonds drifted higher throughout the quarter and moved markedly high over the last two weeks in March. This widening was not the result of a sell-off in corporate bonds. Rather, corporate bonds remained stable as the Treasury market rallied in late March.
  • We expect rates to drift lower during the start of 2013 and intend to keep the portfolio duration slightly long our benchmark. The Fed’s continued buying of new issue mortgage backed bonds has provided a very stable floor to the mortgage market. 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. Agency debentures offer a marginal spread pickup to treasuries. We are committed to seek stable income at the best available price.


Outlook

  • We continue to see major headwinds to the growth of the U.S. economy. There will be very little, if any, fiscal stimulus this year out of Washington. The division in Washington will only add to the uncertainty and volatility in the financial markets. Inflation should remain under control from now thru 2014. Given the tepid job market recovery the feds quantitative easing will most likely continue well into 2014.
  • While a government shutdown was avoided, another potential battle over the debt ceiling looms large later this year. Credit markets are subject to a potential growth scare as the effect of the budget sequesters begins to show up in the economic data. The resolution of the fiscal cliff at year end was little more than kicking the can until later in 2013. Tangible spending cuts must be reached to prevent another circus erupting in Washington over the US debt limited extension.
  • Historically, sustained bond bear markets have not been able to get underway until the Fed tightening cycle is imminent. That continues to suggest rates will remain low throughout 2014. Our goal is to maintain the portfolio duration slightly above its benchmark at this time. There is 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 March 31, 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 rates 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.

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