Ivy Global Bond Fund

Ivy Global Bond Fund
06.30.17

Market Sector Update

  • The reflation trade continued to be under attack during the second quarter of 2017. Energy prices (oil), sluggish wage growth, and softer inflation expectations have had an impact on the global bond markets. It has been argued that the drivers of the recent softness are likely to be transitory; time will tell. The weakness has mainly affected the value of the U.S. dollar as it depreciated relative to the euro, sterling, and Canadian dollar.
  • The Federal Open Market Committee hiked rates for the second time this year and introduced new details for balance normalization. September seems to be the most likely start of this process. Market expectations are for one more rate hike in December by the Federal Reserve (Fed).
  • President Draghi’s comments on inflation in the Eurozone have the bond market questioning the continuation of the European Central Bank’s (ECB) quantitative easing program. Expectations are for the ECB to announce in September an extension of the purchase program at a lower monthly purchase size and to end the program during 2018.
  • The Bank of Japan (BOJ) stood idle and did not provide any future guidance regarding a change in direction with its monetary policy of targeting interest rates. Inflation forecasts suggest that while the BOJ might have overcome deflation, their 2% goal is still not on the horizon.
  • The People’s Bank of China continues to balance supporting their internal growth target, while managing the buildup of financial vulnerabilities, and controlling the outflow of its capital. President Xi continues his consolidation of power and the consensus is that political capital will become more centralized and will allow for more difficult reforms to be introduced.

Portfolio Strategy

  • The Ivy Global Bond Fund underperformed its benchmark, the Bloomberg Barclays Multiverse Index, and its Lipper Category average mainly due to its overweight in the U.S. dollar. The Fund’s 93% exposure to the U.S. dollar hurt the Fund’s relative performance as the dollar softened. The euro, British pound, and Canadian dollar appreciated versus the U.S. dollar 7.31%, 3.78%, and 2.73% respectively.
  • 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 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. Repealing and replacing the Affordable Care Act has proved to be more difficult and could hurt President Trump’s political capital in his efforts for tax reform.
  • 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 with more reserve requirement ratio (RRR) cuts.
  • Realignment of global geopolitics needs to be reevaluated. Russia continues to be a headline risk for the Trump administration and it can’t seem to distance itself from the multiple investigations. Diminishing concerns of a full repeal of the North American Free Trade Agreement (NAFTA) has allowed the Mexican peso and local rates to rally. Mexican local rates and currency will be more volatile and subject to market emotions regarding fiscal, monetary, and trade policies.
  • The U.S. budget deficits are on the rise and will continue with Trump's pro-growth policies. Treasury supply will increase and will be funded largely through T-bill issuances 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 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.

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.

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