Market Sector Update
- Despite slowing to below 1.0% annualized
in the first quarter, U.S. gross domestic
product (GDP) growth rebounded to
approximately 2.5% in the second quarter
of 2016. Growth in underlying retail sales
reached a two-year high in May,
suggesting real consumption growth of
- Headline consumer price index (CPI)
inflation has changed little in the quarter
and is around 1%, but much of that reflects
earlier sharp declines in energy prices.
The CPI measure of core inflation has
been above 2% for some time. The
Federal Reserve’s (Fed) preferred core
personal consumption expenditures
(PCE) measure remains markedly lower at
- The unexpected sharp slowdown in the
pace of payroll gains in May is concerning
to the data-dependent Fed. The
expected interest rates implied by Fed
Funds futures dropped significantly
following the disappointing May payroll
data and again after the surprise United
Kingdom (U.K.) vote to leave the
- Some of the largest effects of the Brexit
vote have been felt in the currency
markets, with sterling falling by more than
10% against the dollar. Although the dollar
has had a broad-based strengthening on
the back of the safe haven flows, the
trade-weighted appreciation has been
- Interest rates rallied in the global rate
market, with international growth
concerns and the flight-to-quality trade
that occurred after the Brexit vote.
- Credit spreads tightened over the course
of the quarter as the reflation trade
improved, with oil and commodities
rallying. The Brexit fears have pressured
spreads but, as of now, it is only a political
concern and not a growth concern.
- The Fund underperformed the Barclays
Multiverse TR USD Index, primarily due to
the relatively shorter effective duration
versus the index. Global demand for longterm
duration led to a dramatic decline of
the term structure of interest rates in
countries such as Germany, Japan, and the
U.K. The Fund’s lack of exposure to the
Japanese yen also hurt its relative
exposure, as the yen appreciated 9%
versus the U.S. dollar.
- We continue to seek opportunities to
reduce the volatility in the Fund.
- We are maintaining a low duration
strategy for the Fund as it allows us a
higher degree of certainty involving those
companies in which we can invest.
- We continue to focus on maintaining
proper diversification for the Fund.
- We look for opportunities to make longterm
investments in foreign currencies in
certain emerging markets should they
weaken vs. the U.S. dollar.
- We continue to hold a higher level of
liquidity (patient capital) because of
structural changes in the capital markets.
We will be opportunistic in allocating that
capital when dislocations in market arise.
- Activity in the United States seems to have
rebounded from weakness in 1Q and
leading indicators suggest some further
firming ahead. However, Brexit has sent
shockwaves through the financial markets
and the political establishment in many
European countries. There is a renewed
risk of an economic slowdown and financial
- Brexit could be seen as a watershed event
that could reinforce trends towards
nationalism, and isolationism. All could be
seen as inflationary in nature, long-term.
- Soft data coming out of China suggests
that growth momentum may have
moderated. As investment is still an
important driver of growth, our
expectation is that another round of
stimulus may be coming. Monetary policy
will remain accommodative with more
reserve requirement ratio (RRR) cuts. If the
flight-to-quality continues and the dollar
appreciates, look for the People’s Bank of
China (PBOC) to offset with depreciation
- Longer Treasury rates will be more volatile
regarding fiscal and monetary policies.
The decline in Treasury yields is not
following a conventional path. Long-term
U.S. rates seem to be saying more about
the fragility of Europe and Japan than
about the U.S. The expectation is for the
Federal Open Market Committee to
continue the normalization of rates but at
a slower trajectory than the Fed's
- The structural change in the financial
market has led us to build up more
liquidity (patient capital). Incentives to
carry high inventory levels of corporate
bonds have been reduced by higher
capital requests, therefore making it more
expensive to hold high levels of these
bonds. As a result, market liquidity has
been reduced and there are more
opportunities for dislocations in the
corporate bond going further.
The opinions expressed in this commentary are those of the Fund’s managers and are current through June 30, 2016. The managers’ views are 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.
Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a portfolio and the variable insurance product. This and other important information is
contained in the portfolio and variable insurance product prospectuses, which may be obtained at www.ivyinvestments.com, from a financial advisor, or by contacting the applicable insurance company.
Read them carefully before investing.
Risk factors. The value of the Fund’s shares will change, and you could lose money on your investment. International investing involves additional risks including currency fluctuations, political or economic conditions
affecting the foreign country, and differences in accounting standards and foreign regulations. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest
rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Loans (including loan assignments, loan participations and other loan
instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes
trade infrequently on the secondary market. These and other risks are more fully described in the Fund’s prospectus. Not all funds or classes may be offered at all broker/dealers.
IVY INVESTMENTSSM 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.
Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a mutual fund. This and other important information is contained in the prospectus and
summary prospectus, which can be obtained from a financial advisor or at www.ivyinvestments.com. Read it carefully before investing.