Market Sector Update

• Positive economic indicators including robust corporate earnings, consumer confidence at decade-high levels, and a substantial sell-off in the Treasury market prolonged the risk-on environment throughout the third quarter. Second quarter gross domestic product (GDP) was revised upwardly in July and the 10-year note is now holding steady above 3%.
• As widely anticipated, the Federal Reserve (Fed) raised rates by a 0.25-percentage point in September. Despite it being the eighth rate hike in the current cycle, inflationary pressures remain on longer dated credit and the flattened yield curve persists.
• The risk-on environment continues to favor high-yield bonds for the year and the quarter. Citing the ICE BofAML US High Yield Index as a reference, high-yield bonds returned 2.4% for the quarter. Leveraged loans posted an impressive gain of 2.0%, the strongest performance within a quarter since Q4 2016.
• Yields on the asset class decreased slightly to 6.3% while the credit spread narrowed to a decade low in September. Across the credit spectrum, lower rated bonds continued to outperform relative to higher rated bonds outside a slight reversal in August. For the quarter, CCC credits returned 2.9%, while B and BB rated investments were both up 2.4%. The top industry performers year-to-date (YTD) are retail (+5.02%) and telecom (+5.68%), whereas the largest underperformers are autos (-4.05%) and housing (-0.46%).
• High-yield mutual fund outflows continued over Q3 but were more muted than previous quarters, equating to a loss of approximately $1.0 billion. YTD outflows total -$25.5 billion for the asset class versus -$10.9 billion during the same timeframe in 2017.
• New issue activity decelerated in the quarter, with new volume totaling around $42.1 billion. This marked the lowest level of activity for a quarter since the end of 2011. Leverage loan issuance totaled $94.6 billion.
• At the end of the quarter, the U.S. loan market is now roughly the same size as the U.S. high-yield market at $1.1 trillion. Five years ago the U.S. high-yield market was also $1.1 trillion while the U.S. loan market was $683 billion.

Portfolio Strategy

• Although many firms on the street recommended a decrease from an allocation standpoint to high yield at the beginning of 2018, the asset class has been a top performer across fixed income. With lower credit quality bonds continuing to outperform higher credit quality bonds, the risk-on environment continues especially within noninvestment grade. YTD, CCC credits are up 6.06% versus BB credits up 0.76%.
• Despite the instability experienced within a variety of asset classes as of late, high-yield credit spreads narrowed four basis points throughout the quarter. High-yield spreads remained near the lower end of their long-term range, which is consistent with the low risk premium currently observed across other asset classes.
• Although investors welcomed higher yields at quarter-end, they were flirting with decade lows in April. Net supply of new high-yield bonds has been declining recently, creating a positive technical backdrop in the market place. Technicals, however, do not replace fundamentals in our decision making process. Managing the amount of risk we are willing to take for moderate returns in this setting is becoming increasingly important.
• Even though high yield is more correlated to equities than other credit strategies, it historically has offered more downside protection than stocks in volatile times. It continues to be our view that the tailwinds from corporate and individual tax reform, along with deregulation and the resulting boost in consumer and business confidence will outweigh global trade worries and headwinds for now. The downward trend of default activity for the quarter also remains constructive for the asset class.
• It is our view that finding value in the high-yield market has become increasingly more difficult and considerable caution is warranted in making new investments. As such, we believe our continued process of bottom-up, in-depth fundamental research and analysis will guide us to those investments where the risk/reward is in our favor.

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 Sept. 30, 2018, 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.

Risk factors: The price of the Fund’s shares will fluctuate with market conditions and other factors. Fund shares are not guaranteed or endorsed by any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation. Closed-end funds frequently trade at a discount from their net asset values (NAVs), which may increase an investor’s risk of loss. At the time of sale, shares may have a market price that is below NAV, and may be worth less than the original investment. There is no assurance that the Fund will meet its investment objective. Investing in high-income securities may carry a greater risk of nonpayment of interest or principal than with 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.

The ICE BofAML US High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. It is not possible to invest directly in an index.

An investment in the Fund is not appropriate for all investors and is not intended to be a complete investment program. The Fund is designed as a long-term investment and not as a trading vehicle.

Ivy Investment Management Company (IICO) serves as the Fund’s investment adviser. IICO is a wholly-owned subsidiary of Waddell & Reed Financial, Inc.

The Fund is a closed-end exchange traded investment company. This material is presented only to provide information and is not intended as investment advice or recommendations for trading purposes. Closed-end funds, unlike open-end funds, are not continuously offered. After the initial public offering, shares of closed-end funds are sold on the open market through a stock exchange. Investment policies, management fees, risks other than those mentioned above, and other matters of interest to prospective investors may be found in the closed-end fund prospectus used in its initial public offering. For additional information, contact our sales desk at 800-532-2780.