Ivy Limited-Term Bond Fund

Ivy Limited-Term Bond Fund
12.31.18

Market Sector Update

  • The yield on the 2-year U.S. Treasury note began the quarter at 2.82%, reached a high for the year in November at 2.97%, then fell to 2.49% at year end.
  • The decline in U.S. Treasury yields in the quarter can be attributed to a combination of things. First, the statement following November’s Federal Open Market Committee (FOMC) meeting referred to economic growth as “moderating,” a shift from the previous reference of “strong.” Second, the tariff and trade tension with China brought a great deal of uncertainty to the macroeconomic landscape as well as the outlooks of corporations involved in global commerce. Third, Brexit headlines frequently appeared, contributing to global growth uncertainty. Last, oil prices fell dramatically.
  • The Federal Reserve (Fed) raised rates at the December meeting as expected. It was the fourth hike this year and the ninth hike in this cycle.
  • The yield curve became slightly inverted in December. At year end, the yield on the 3-year U.S. Treasury was 2.46%, three basis points (bps) below the 2.49% yield on the 2-year U.S. Treasury. Typically, the market’s focus on a yield curve inversion refers to the difference in yields between the 2-year and 10-year U.S. Treasury notes, which at year end was nearly twenty bps, but fell to as low as eleven bps earlier in the month. This bears watching as an inverted yield curve generally precedes recession by 12-24 months.
  • Just as the equity market in the U.S. had a rough fourth quarter, so did U.S. corporate bonds. Pressure on the equity of a company also puts pressure on the company’s debt. Corporate excess return, as measured by the Bloomberg Barclays U.S. Credit Index, was -95 bps in the quarter, measured against duration-matched U.S. Treasuries.

Portfolio Strategy

  • We continued reducing overall corporate bond exposure in the quarter and added to the Fund’s U.S. Treasury allocation.
  • We increased portfolio duration as we added U.S. Treasuries, but maintained overall portfolio duration below the benchmark.

Outlook

  • At the December FOMC meeting, the Fed lowered its forecast for the number of 2019 rate hikes from three to two. The range on the federal funds rate is currently 2.25%-2.50%, and many feel the neutral rate is at or below 3%. There seem to be some cracks already appearing in the domestic data. Most market participants expect the Fed to pause for one or two quarters, while some believe the next move will be to lower rates.
  • We plan to continue reducing corporate exposure in the first quarter and increase U.S. Treasury exposure. We have kept a significant allocation to cash for several months as commercial paper rates have been quite attractive without taking duration risk. We have dry powder to take advantage of dislocations in the short end of the credit market and are comfortable with the underlying credits.
  • We will watch incoming data and the yield curve and will make adjustments to duration when we feel it is appropriate.

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 Dec. 31, 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.

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.