Ivy Advantus Bond Fund

Ivy Advantus Bond Fund
06.30.17

Market Sector Update

  • Optimism about the new administration’s growth proposals have certainly faded from early in the year. The 10-year Treasury yield fell along with growth expectations as legislative progress has been slow to arrive. Actions on reduced regulation or tax cuts may provide the main boost for growth from the White House this year.
  • Despite reduced optimism, the economy continues to perform smoothly, with gross domestic product (“GDP”) likely bouncing back in the second quarter from a weak first quarter. Steady results in employment and housing, and a continued strong lift in consumer confidence led to strong business sentiment.
  • Stocks hit new highs again, despite lower growth optimism and decidedly weaker inflation. All asset classes have done pretty well in an environment that doesn’t require the Federal Reserve (“Fed”) to act too hastily in raising interest rates – continuing the balance that’s persisted for quite some time of slow growth, low inflation and accommodative monetary policy.
  • One of the biggest surprises this year has been the record low stock volatility - both realized and implied. The market’s risk measure, CBOE VIX® (“VIX”), has recorded some of its lowest readings ever. Against the more unconventional political backdrop in Washington, and what could be a season of substantially more policy uncertainty, this appears to be at odds with investor expectations. Another surprise is that oil entered a bear market, down $11.36 from $57.40 at its high this year, which put pressure on oil stocks, bonds and peripheral energy exposures.
  • The Fed raised rates 25 basis points in June, following a similar rise in March and last December. Markets paid little attention other than to drive longer-term Treasury yields lower. The big story in bonds this year has been that longterm rates have fallen as growth expectations and inflation have disappointed. This, along with the Fed raising the federal funds rate, has contributed to a significant flattening in the bond yield curve (difference between long and short yields). The difference between 30-year and 2-year bonds was 145 basis points at the end of the quarter, the flattest yield curve spread between these two rates since September 1, 2016.
  • Slow and steady economic growth and low inflation are good ingredients for non-government (corporate and other) bond performance versus Treasuries. Investment grade and high yield corporate bonds outperformed Treasuries in the quarter, as did all other fixed income sectors except for agency mortgage backed securities.
  • Spreads in most of the non-government sectors are now pretty narrow when considering historical experience. Despite the favorable mix of economic growth and inflation, value in non-Treasuries is getting more difficult to find.

Portfolio Strategy

  • We reduced the Fund’s corporate bond exposure over the quarter, primarily in the industrial sector. In particular, we reduced positions in the communications sector. We believe this sector is poised for underperformance driven by shareholder friendly managements and a rapidly changing competitive landscape. We added to the Fund’s exposure in financials, all within the insurance space. We believe this sector will outperform industrials as we move further along in this credit cycle. Exposure to Agency MBS declined as pay downs were reinvested elsewhere, mostly in Treasuries. We kept the duration of the Fund slightly short of its benchmark.

Outlook

  • We remain optimistic about the prospect for economic growth above 2% for the second half of the year. The likelihood of continued business investments remains high as reflected by the elevated readings in small and large business optimism. While the Fed has been raising short term rates, overall interest rates remain very low and the Fed is still accommodative with continued purchases of long term bonds that keep bond yields lower than they otherwise might be. We expect the Fed to raise interest rates again this year and to begin scaling back its bond buying program by reinvesting less of the portfolio that matures. This should put some upward pressure on bond yields.
  • We believe that policy changes will come from the administration and Congress to boost growth. But those changes are likely to be later than originally anticipated, moving any substantive growth to 2018. Coupled with a more robust global growth outlook, this could be a good combination for next year.
  • The U.S. just completed the eighth year of this recovery and expansion. We believe there are likely two or more years remaining in this one. Financial crises are usually succeeded by long slow expansions and we think this expansion could rival the longest in history, which was in the 1990s. Both expansions were preceded by housing and banking crises. This current expansion with slow and shallow growth along with very low inflation has resulted in few sectors of the economy becoming over heated and over invested. While many risks remain in the later stages of the business cycle (e.g., the Fed in tightening mode and high corporate debt issuance), we believe there is a better chance for growth to rise in the coming quarters. Ultimately, risk markets could benefit from the better economic tone.
  • We are becoming a bit more cautious on corporate credit relative to other non-government sectors. Corporate credit growth has risen faster than GDP growth for some time and spreads are near the tightest levels since the financial crisis. Offsetting these concerns somewhat is our view that the credit cycle has some more room to run. We also continue to expect strong demand for corporate bonds from both domestic and international buyers searching for yield in a low growth, low rate environment.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 30, 2017, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The Ivy Bond Fund was renamed Ivy Advantus Bond Fund on April 3, 2017.

Risk factors: 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 rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. These and other risks are more fully described in the Fund's prospectus. Not all funds or fund classes may be offered at all broker/ dealers.

IVY INVESTMENTS® refers to the investment management and investment advisory services offered by Ivy Investment Management Company, the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds and IVY VARIABLE INSURANCE PORTFOLIOS℠ , and the financial services offered by their affiliates.