Ivy Government Securities Fund

09.30.20

Market Sector Update

  • The Federal Reserve (Fed) remained a dominant buyer in the U.S. Treasury, U.S. agency mortgage and U.S. corporate bond markets in the third quarter. The Fed’s participation improved market functionality and liquidity. With the Fed’s purchases of corporate credit and credit ETFs, credit spreads witnessed a full credit cycle in basically one quarter. The Fed’s focus on market functionality has led some to believe it might extend the average duration of the quantitative easing program.
  • The Fed’s commitment to keeping rates low has anchored the front end of the yield curve to extremely low levels. The 2-year U.S. Treasury note yielded 15 basis points (bps) at the beginning of the quarter and was slightly lower at 12.9 bps at quarter end. The Fed announced at its September meeting it was going to focus on the employment portion of its dual mandate. There is a willingness to allow inflation to overshoot an average of 2% before triggering a rate hike response. In other words, rate hikes are unlikely for a long time.
  • Spreads on agency mortgage bonds continued to tighten in the quarter across the agency pass through, agency commercial mortgage-backed security (CMBS) and agency collateral mortgage obligations (CMOs) asset classes. The Fed is expected to continue net purchases of $40 billion per month in agency residential mortgage-backed securities. This is most of the expected net mortgage-backed security supply through the end of the year. We believe the Fed’s involvement will continue to be supportive of spreads in the mortgage market.

Portfolio Strategy

  • The Fund underperformed its benchmark for the quarter. We have been focused on purchasing longer duration mortgage-backed securities, primarily agency CMOs with lower premiums and attractive current yield and agency CMBS with solid prepayment protection.
  • The Fund is slightly overweight securitized products relative to the benchmark. We also added agency callable securities as we believe higher yielding securities will outperform in a low volatility rate environment over the next six to twelve months.

Outlook

  • We believe short-term interest rates will stay near zero for the foreseeable future, and that low inflation will keep a lid on long-term rates. Sizable fiscal packages earlier in the year provided much needed income support for sidelined workers and financial support for businesses facing interruptions in demand and cash flows. However, these packages are not fiscal stimulus that will generate sustained stronger growth in our view.
  • The upcoming U.S. election is shaping up to be more interesting than most. Markets will not only have to contend with the usual uncertainty around the outcome, but also the potential uncertainty around the process and the timeliness of the results. The policy differences between the parties are arguably more stark than usual.
  • The September unemployment rate was 7.9%, down from the high of 14.7% in April, but much higher than the 3.5% rate in February. There is still a chance for fiscal stimulus, but the U.S. election may make progress difficult in the near term.
  • We will continue to look for opportunities to enhance returns in the Fund as we maneuver through the uncertainty ahead.

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, 2020, 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 impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.

All information is based on Class I shares.

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.