Ivy Government Securities Fund

Ivy Government Securities Fund
09.30.18

Market Sector Update

  • U.S. Treasury yields continued their climb higher in the third quarter. The 2-year note increased 29 basis points (bps) to 2.82% and the 10-year note rose 20 bps to 3.06%. The Federal Reserve (Fed) hiked interest rates in September for the eighth time in this cycle, as expected. Currently, the upper range for the federal funds rate is 2.25%.
  • Revised estimates showed second quarter GDP increased at a 4.2% growth rate. This was the strongest reading since 2014. President Trump’s pro-business policies and tax cuts are credited with improving business confidence, capital expenditures and overall output. Most of the incoming economic data exhibited strength including consumer confidence and the ISM manufacturing surveys.

Portfolio Strategy

  • We reduced exposure to long U.S. Treasury securities and are now below benchmark in the long duration bucket. We added U.S. Treasuries across the curve inside ten years and added agency commercial-backed mortgages – Fannie Mae Delegated Underwriting and Servicing (FNMA DUS) bonds and FNMA Alternative Credit Enhancement Securities – because of their bullet-like characteristics. We are willing to forego a little yield for the certainty of the maturity of the bonds.
  • The mortgage-backed bonds in the Fund had a positive return in the quarter while the mortgage component of the Fund’s benchmark posted a negative return. The Fund’s duration ended the quarter at approximately 93% of the benchmark.

Outlook

  • The Fed is widely expected to raise rates again in December. Consensus is more difficult in 2019 and beyond, primarily because many believe we are close to the end of the hiking cycle. Another increase in December would put the rate at 2.50%. Many feel the terminal, or final fed funds rate, in this cycle could be around 3%. If that is true, it means there may only be a few hikes in 2019 or later.
  • Tariffs and trade issues may bleed through into growth in the coming quarters and could cause the Fed to pause for a quarter or two. Time will tell if the President’s trade policies have a negative effect on growth in the third quarter. One thing Fed Chairman Powell has been transparent about is the fact that the incoming data will be used in determining the pace of rate hikes. He has been clear the Fed wishes to keep the recovery going while also keeping with the plan to normalize interest rates.
  • We could see more market volatility in the fourth quarter as the midterm elections take place next month and could change the political landscape. Oil prices have been steadily rising. The labor market continues to be strong and labor costs appear to be rising finally. We will be watching to see if inflation remains tame.

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. Past performance is not a guarantee of future results.

Rick Perry served as a portfolio manager on the Fund until April 12, 2018.

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.