Ivy Limited-Term Bond 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. This was a continuation of the extreme market support it began in the second quarter. The Fed’s participation included purchases of corporate credit and credit ETFs, which improved market functionality and liquidity. Credit market participants regained confidence bolstered by the Fed backstop, driving credit spreads through a full credit cycle in just a few months. 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 corporate bonds continued to tighten in the quarter. The Bloomberg Barclays U.S. Credit Index, a good gauge of investment-grade credit, a subset of which is part of the Fund’s benchmark, ended the quarter at 128 bps, 14 bps tighter than when the quarter began. For reference, the index spread was 90 bps at the end of 2019 and 255 bps at the end of the first quarter. Clearly, the commitment of support from the Fed has aided performance in the corporate bond market.
  • Investment-grade corporate bond issuance has been record-setting with the market wide open due to the Fed’s support. Net new corporate bond issuance for 2020 reached the $1 trillion level in the quarter. The previous record net issuance was $681.6 billion for calendar year 2016. Initially, liquidity purposes due to uncertainty from the pandemic and shutdowns drove the rush to issue bonds. While liquidity is still a reason for issuance, many corporations are tapping the market for acquisitions, stock buybacks and debt refinancing.

Portfolio Strategy

  • The Fund outperformed its benchmark for the quarter. An allocation to U.S. Treasuries has given the Fund plenty of “dry powder” to be opportunistic. While helpful in times of stress, U.S. Treasuries in the front end of the curve are yielding so little that we have been actively reducing our exposure in favor of spread products adding more yield to the Fund.
  • The Fund added approximately 5% to its corporate bond allocation during the quarter. U.S. Treasuries were sold to finance the purchases.

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.

The Bloomberg Barclays U.S. Credit Index measures the investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government-related bond markets, including a non-corporate component of non- U.S. agencies, sovereigns, supranationals and local authorities. 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. 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 rate rise. These and other risks are more fully described in the Fund's prospectus.