Ivy Limited-Term Bond Fund

03.31.21

Market Sector Update

  • An improving economic outlook caused yields to rise across the maturity curve in the first quarter. While the yield on the 2-year U.S. Treasury note increased just under four basis points (bps) to 16 bps, the 3- and 5-year maturities saw yields move more dramatically from 18 and 57 bps to 35 and 94 bps, respectively.
  • The third round of stimulus combined with a successful vaccine rollout has increased both optimism and the prospects of a return to normalcy sooner rather than later. Employment rose 1.6 million in the quarter. While unemployment remains higher than pre-pandemic, the reopening of our communities has helped to recover about 62% of the jobs lost in the pandemic. Near the end of the quarter, the Biden administration announced an infrastructure wish-list to help build and repair highways, bridges, airports, water systems, electric grids and increase broadband access across the country. These are some factors leading to the greatly improved economic outlook and expectations for growth in 2021 after an unprecedented drop of -2.4% gross domestic product growth in 2020.
  • The Federal Reserve (Fed) was dovish at its March meeting and does not expect to taper its purchases of securities or to hike soon. The rise in yields was not a great concern as the prospects of growth naturally lead to a rise in yields. While it is anticipated that inflation will be elevated this year, Fed Chairman Jerome Powell expects it to be temporary. He noted the Fed wants to see inflation overshoot the 2% target for an extended period before taking action.
  • Credit spreads were subdued in the quarter. The Bloomberg Barclays U.S. Credit Index, a good gauge of credit spreads, a subset of which is part of the Fund’s benchmark, traded in an 11 bps range over the quarter and ended the quarter at 86 bps, six bps tighter than at year-end.

Portfolio Strategy

  • The dramatic rise in yields and the steepening of the yield curve presented an attractive opportunity to increase duration and the Fund’s allocation to intermediate maturities.
  • We added approximately 8-9% to our overall weighting in the 3- to 5-year part of the curve, raising duration slightly over the benchmark.
  • Most of the purchases in the Fund were in investment-grade corporate bonds. The decision to own any bonds beyond the maturity of those in the benchmark, however, caused the Fund’s underperformance in the quarter.

Outlook

  • Rising yields can be unsettling to bond markets because they can lead to losses. We believe these rate moves present opportunities to add yield to the Fund at a time when it is relatively cheap. We don’t think rates will go materially higher and remain there. We believe the Fed has plenty of tools to use if it feels the need to calm the markets. While we don’t know what level would cause Fed action, we feel it will act to lower yields should it be necessary. The Fed has said it will be keeping rates low for a long time. We believe the portfolio is now better positioned to participate in the carry trade in the market.
  • We are still in the throes of a pandemic that has brutally taken so many lives and livelihoods. While it has been a difficult year, many people have been vaccinated and some level of normalcy is beginning to return. Both the desire and the ability to return to a sense of normal are necessary for the economy to begin to return to growth.
  • Our first responsibility is capital preservation. With that responsibility always in view, we will look for opportunities to invest in securities in which we have high conviction that their addition will positively contribute to the Fund’s total return over the life of the investment.

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, 2021, 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.