Ivy Global Bond Fund

Ivy Global Bond Fund
06.30.18

Market Sector Update

  • U.S. Inflationary pressures are starting to gradually accelerate with unemployment rates now standing at 3.8%. The labor market moved beyond full employment and core inflation is likely to overshoot the Federal Reserve’s (Fed) 2% inflation target.
  • The Trump administration’s policies regarding international trade and investment have emerged as an important source of downside risk for the global economy. The costs could rise if the trade war escalates into a multilateral trade war or if the global equity markets drop sharply around the world.
  • Central banks likely will continue to normalize their policies, driven by strengthening growth and easy financial conditions. The Fed will likely continue raising its policy rate at a gradual pace and the European Central Bank (ECB) recently announced its tapering program will end additional purchases by December 2018.
  • As global liquidity wanes, weaker emerging markets countries such as Turkey, Argentina, Brazil and Mexico are all feeling these effects with wider credit spreads, weaker currencies and lower stock prices.
  • Volatility in the global fixed income markets has increased, which has made investing more complicated.
  • Political concerns emerged from elections in Italy and Mexico, which led to a flight-to-quality trade where the U.S. dollar strengthened, credit spreads widened, and U.S. Treasuries rallied. Italy’s new government brought the European Union’s (EU) viability back into the spotlight while the new Mexican president has investors concerned about NAFTA’s renegotiations.
  • The shape of the yield curve should continue to remain flat with the Fed’s intention of raising short term rates and measured inflationary pressures on the long end of the curve. The long end of the curve is also being affected by the push (increased Treasury supply from budget deficits, Fed balance sheet normalization, and increased term premium) and the pull forces (global trade concerns, strong dollar, political concerns, and emerging market volatility).

Portfolio Strategy

  • The Ivy Global Bond Fund underperformed the Bloomberg Barclays Global Credit 1-10 Years USD Hedged Index due to the overweight in emerging market credit. Trade tensions initiated from the Trump administration, as well as political concerns about the EU from Italian elections, led to a rush for dollar assets. Dollar strength led to emerging market weakness that spread from Argentine and Turkish assets to other vulnerable countries. The U.S. dollar strengthened over the quarter with the Japanese yen, British pound and euro depreciating 4.0%, 5.8% and 5.2% respectively. Having a 97% dollar exposure helped the relative return of the Fund’s performance versus its Lipper Category.
  • 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 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.

Outlook

  • We believe the Fed will continue with its gradual rate hikes over the course of the second half of 2018. The market is anticipating one to two more hikes in its policy rate.
  • Labor markets continue to grow and beat expectations, which has kept consumer confidence near cycle highs and supported strong spending growth.
  • Trade will continue to be a risk factor going forward. There is a potential for more tariffs, followed by retaliatory action that might impact capital investment plans for many companies. A negative feedback loop might impact markets, stocks and, ultimately, consumer confidence.
  • U.S. growth should continue to benefit from lower individual and corporate tax burdens, vigorous private-sector hiring and consumer spending.
  • Pressure on U.S. rates should continue, as a growing Treasury supply from budget deficits and Fed balance sheet normalization puts some term premium back into the yield curve.

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, 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. 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 Global Credit 1-10 Years USD Hedged Index measures the global investment grade local currency corporate and government-related bond markets with a maturity greater than 1 year and less than 10 years. The hedged component of the index takes rolling one-month forward contracts that are reset at the end of each month and hedges each non-reporting currency-denominated bond in the index into the reporting currency terms, reducing the index's currency risk. The Global Credit 1-10 Year is a subset of the Global Aggregate Credit Index, a multi-currency index including fixed-rate bonds from both developed and emerging markets issuers. The Global Aggregate Credit Index is a component of the Global Aggregate Index. 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.