Ivy Global Bond Fund

Ivy Global Bond Fund
09.30.17

Market Sector Update

  • Renewed U.S. tax reform discussions have supported another leg up in risk assets in September, with credit spreads sitting well below their average levels.
  • Energy has been one of the best performing sectors in the quarter, as Brent crude oil was up 8.9% in September.
  • In the Forex market, the trade-weighted U.S. dollar has rebounded as the market starts to price in more Federal Reserve (Fed) rate hikes.
  • The Federal Open Market Committee introduced new details for balance normalization. In October the drawdown will initially be capped at $10 billion monthly and will increase by $10 billion quarterly until it reaches $50 billion per month.
  • The European Central Bank is likely to announce its qualitative easing tapering at its Oct. 26 meeting. The program should start in January 2018. The era of lower rates, including negative rates, and an ever-expanding balance sheet is starting to wind down.
  • The Bank of Japan stood idle and did not provide any future guidance in a change in direction with its monetary policy of targeting interest rates. Inflation forecasts suggest that while the BOJ might have overcome deflation, the 2% goal is still not on the horizon.
  • China’s State Council announced that they would implement a targeted reserve requirement ratio (RRR) cut to commercial banks to support small businesses and to counteract the slowdown in growth in the third quarter. The Peoples’ Bank of China (PBoC) is making some pre-emptive moves to reduce the risk of a more severe slowdown.
  • Scrutiny of BREXIT talks will heat up as negotiations continue. The end point should be a softer Brexit, although the path to get there will likely be challenging.

Portfolio Strategy

  • The Fund outperformed before expenses the Bloomberg Barclays Multiverse, Lipper Category Average, and Morningstar Category Mean in the third quarter due to an overweight position in corporate credit. Demand for income continues to attract foreign capital into the credit markets and credit spreads have benefited from that international demand. Volatility in the rates market was low and had little impact on the returns of the Fund, benchmark, or Lipper peer group. The US. dollar weakened over the quarter with the Canadian dollar, euro, and British pound appreciating 3.94%, 3.40%, and 2.86%, respectively. Having a 95% dollar exposure hurt the relative return of the Fund versus its benchmark and peer groups.
  • 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 long-term investments in foreign currencies in certain emerging markets should they weaken versus the 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 the market arise.

Outlook

  • Dollar strength will depend on many recently changing factors: the Fed becoming more hawkish while other central banks are on the sidelines, major fiscal stimulus and regulatory rollbacks in the U.S. becoming a reality, and European and Japanese growth disappointing sufficiently to lower expectations of monetary tightening. Dollar weakness will continue if the soft inflation data does not prove to be transitory. The market will then question the Fed’s intentions in raising policy rates over the next 18 months. Fiscal policy also provides uncertainty for the U.S. dollar.
  • Investors are concerned that tax reform will be underwhelming because of the multiple failures of the Trump administration thus far. But there are huge vested interests for both the Republicans in Congress and Donald Trump to make reform happen, and there appears to be a lot more coordination between the powers-that-be.
  • Emerging market (EM) risk aversion has been consistently declining year-to-date. With attitudes to EM improving, valuations are becoming less attractive even though macro conditions remain firm. Concerns of rewriting the U.S. rules of engagement in global trade have investors concerned.
  • Soft data coming out of China suggest 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 and RRR cuts show the PBoC is making some pre-emptive moves to reduce the risk of a more serve slowdown.
  • The U.S. budget deficits are on the rise and will continue with Trump’s pro-growth policies. Treasury supply will increase commensurate with the deficit and will be funded largely through T-Bill issuance absorbed by new money market reforms, as well as incremental demand from Japanese investors searching for yield.

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, 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.

Diversification and asset allocation are investment strategies that attempt to manage risk within your portfolio but they do not guarantee profits or protect against loss in declining markets.

The Bloomberg Barclays Multiverse Index is an unmanaged index comprised of securities that represent the global bond market. It is not possible to invest directly in an index.

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.