Ivy Limited-Term Bond Fund

06.30.20

Market Sector Update

  • The phrase “Don’t fight the Fed” describes the environment over the last three months in the taxable investmentgrade bond universe. The Federal Reserve (Fed) announced in late-March it would support the market through purchases of U.S. Treasuries, agency mortgage-backed securities, secondary corporate bonds and new-issue corporate bonds. This commitment has expanded to include ETFs and some high-yield credit.
  • The pledge from the Fed has strengthened liquidity in these markets. The Fed’s balance sheet was less than $4 trillion prior to the late-March announcement and was more than $7 trillion at the end of June.
  • Spreads on corporate bonds and mortgage-backed securities tightened significantly in the quarter, but neither has returned to pre-pandemic levels. 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 2019 at a spread of 90 basis points (bps), ended the first quarter at 255 bps and ended at 142 bps on June 30. The improvement in these markets can be directly attributed to the Fed and its swift and strong commitment to support the credit and mortgage markets.
  • U.S. Treasury yields continued to go lower on the front end of the curve. The 2-year U.S. Treasury yielded just 15 bps at quarter-end, nearly 10 bps lower than at the start of the quarter.
  • While spreads on corporate bonds and mortgage-backed securities are tighter than in the initial throes of the pandemic, the collapse in U.S. Treasury yields over the past four months means these securities are yielding much less now than in 2019.
  • With bond investors gobbling up new issues due in part to the Fed’s support of the credit market, corporations issued a record pace of more than $800 million in debt in the quarter.
  • Some debt was issued to replace debt maturing in 2020 and 2021, while other issuers used debt to replace lost revenue and help manage through pandemic-driven economic trouble. Still others issued because the primary market is “open for business,” the Fed is buying corporate bonds and debt is relatively cheap. Regardless of the reason, leverage continued to climb higher in the quarter despite already elevated debt levels in the corporate bond market.

Portfolio Strategy

  • The Fund outperformed its benchmark for the quarter. The Fund was well positioned when the pandemic hit as the allocation to U.S. Treasuries was roughly 50% of Fund net assets.
  • Both new and secondary corporate bonds were added to the Fund in the quarter as opportunities arose. The corporate bond exposure increased roughly 8% by using cash and selling U.S. Treasuries to fund the purchases.

Outlook

  • We don’t believe spreads will tighten materially in the future due to economic uncertainty and corporate debt at extreme levels. Although U.S. Treasuries have low yields with little hope of increasing anytime soon, they are a great source of liquidity and help the Fund’s total return in time of stress. We continue to look for opportunities to add yield when we feel the risk taking is prudent, but we will maintain a significant allocation to U.S. Treasuries.
  • We are in a pandemic and thousands of lives have been lost. We have never been in this situation before and we do not know when it will end. The initial job losses came from the immediate, temporary closures primarily in the retail and hospitality industries. Unfortunately, some of those closures and job losses are likely to be permanent. Sales-tax revenue losses likely mean job losses at the local and state government levels. The gross domestic product loss in the second quarter is likely to be massive. Consumer spending habits have changed, the future of office environments are in flux and unknowns persist in the face of re-openings. In our view, the lasting effects of this pandemic and financial crisis are yet to be fully understood.

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 June 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.