Ivy Limited-Term Bond Fund

Ivy Limited-Term Bond Fund
03.31.19

Market Sector Update

  • The first quarter saw strong performance in U.S. Treasuries and U.S. corporate bonds. The yield on the 2-year U.S. Treasury Note ended the quarter at 2.26%, nearly 23 basis points (bps) lower than year-end 2018. Yield compression was more pronounced on the 5-year U.S. Treasury Note, as it ended March at 2.23%, 28 bps lower than the end of last year.
  • The Bloomberg Barclays U.S. Credit Index, a good overall gauge for investment grade credit, tightened 30 bps during the quarter and delivered an excess return of 252 bps over duration-matched U.S. Treasuries.
  • After raising rates for the ninth time in this tightening cycle in December, the Federal Reserve (Fed) started a new message of “patience” in January. During the press conference following the January Federal Open Market Committee (FOMC) meeting, Fed Chairman Jerome Powell implied that rate hikes were off the table for the remainder of the year. This greatly surprised the markets, as the message in December was to expect two hikes in 2019. The new messaging caused a rally in the U.S. Treasury market, which also was boosted by the partial government shutdown, weakening domestic and global economic data, ongoing Brexit drama and the continued trade war with China.
  • The FOMC’s March meeting included the plan to end the balance sheet reduction program in September. Chairman Powell expressed satisfaction with strong employment and low inflationary pressures. He indicated the Fed can afford to be patient and help keep the economy plugging along until inflation continually exceeds the 2% target. This should keep interest rates lower for longer and opens the possibility that the Fed hiking cycle is over.
  • The yield curve inverted slightly on March 22 as the spread between the 10-year U.S. Treasury Note and the 3-month U.S. Treasury Bill turned negative. The inversion lasted five business days. Historically, an inverted yield curve implies a forthcoming recession, but the time lag can be significant – typically six to 24 months following the inversion.

Portfolio Strategy

  • The Fund had a positive return, but slightly underperformed relative to its benchmark for the quarter.
  • We reduced the Fund’s cash position, which we had kept at a higher level due to market uncertainty in late 2018. We increased our allocation to U.S. Treasuries during the first quarter. We also increased our exposure to commercial mortgage-backed securities (CMBS), preferring them to the types of mortgage-backed securities in which the Fed has been involved. CMBS often have “bullet like” maturities, similar to both corporate bonds and U.S. Treasuries.
  • With more certainty on Fed policy, we increased duration in the Fund, but still remain below benchmark duration.

Outlook

  • We will be opportunistic in further reducing our corporate bond exposure and increase our U.S. Treasury exposure over the next several months.
  • We believe fixed income should perform well with the Fed on hold and waiting for inflation to achieve its target level. Some market participants believe the next move from the Fed will be a rate cut. Domestic rates are much higher than in other developed markets, most notably Japan and Europe, where negative rates have been in place for several years. The Fed may come to believe that the current federal funds rate range of 2.25%-2.50% is the neutral rate in this environment.

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 March 31, 2019, 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 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.