Ivy Limited-Term Bond Fund

12.31.20

Market Sector Update

  • The Federal Reserve (Fed) remained a dominant buyer in the U.S. Treasury and U.S. agency mortgage markets in what has become a mainstay, especially in times of turbulence, over the last decade. In addition, the Fed continued to directly participate in the U.S. corporate bond market in the fourth quarter, a continuation of the extreme market support it began in March. While Treasury Secretary Mnuchin announced the facilities that enabled the Fed to buy corporate bonds and ETFs would expire at the end of 2020, many market participants believe there is an implicit backstop for credit should the situation deteriorate meaningfully. In other words, the market trusts the Fed will come to the rescue should liquidity disappear again.
  • 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 12.2 basis points (bps) at the end of the quarter, less than a basis point lower than when the quarter began. While the front end of the curve remained stable, there was some rate volatility further out on the curve as the 5-year yield rose modestly from 28 bps to 36 bps and the 10-yr rose from 68 bps to 91 bps over the three months ending 12/31/20.
  • Spreads on corporate bonds continued to tighten in the period. 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 92 bps, 36 bps tighter than when the quarter began. For reference, the index spread was 90 bps at the end of 2019 and 341 bps at its widest in March 2020, just before the Fed announced its intention to purchase corporate bonds.
  • As the quarter progressed, more clarity with respect to the U.S. election results as well as positive news on vaccines and stimulus contributed to the momentum in risk assets and longer rates. Although the world looks very different now than it did a year ago, the credit index ended 2020 just 2 bps wider than when the year began, as strong technicals and unprecedented monetary and fiscal support helped to offset the deterioration in corporate balance sheets and economic uncertainty.

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 the Fund’s exposure in favor of spread products adding more yield to the Fund. For context, the yield on the 2-year U.S. Treasury note fell from 1.57% at the end of 2019 to just 12 bps at the end of 2020.
  • The Fund added approximately 8% to its corporate bond allocation and approximately 1.5% to its mortgage-securities allocation during the quarter. U.S. Treasuries were sold to finance the purchases.
  • Within credit allocation, the Fund increased exposure to information technology, consumer cyclical and financial names to the largest degree. From a rating perspective, the Fund continued to selectively add to BBB and a few BB credits which we believe offered favorable risk/reward profiles. The Fund’s duration matched the benchmark’s to start the quarter, but is slightly longer than benchmark duration at year end.

Outlook

  • Although we are somewhat cautious due to potential volatility and rich valuations, an improving economic environment supported by stimulus and confidence in vaccines balances our view as we look further into 2021. In addition, the strong technical backdrop helps to offset stretched credit fundamentals for short-dated spread product.
  • The first quarter looks to be especially challenging with respect to COVID-19 and the knock-on economic impacts. While multiple vaccines appear to have taken the extreme tail risk off the table, the virus is out of control in much of the U.S., overwhelming the health care systems in several regions and continuing to depress economic activity. We believe a large degree of uncertainty will remain with us through much of the year until the virus is contained, and even then, there will likely continue to be significant and lasting impacts on consumer behavior, corporate operations and government responses.
  • President-elect Joe Biden will be sworn in as the 46th president of the United States on January 20. A high priority will be the delivery of vaccines across the nation, as well as assistance to states in the vaccination process. It is expected that the new administration will encourage more fiscal stimulus in the form of direct checks, extended unemployment insurance, rent and mortgage forbearance, help to impacted businesses and an infrastructure program. As these policies are announced and implemented, we believe they will have wide-ranging implications for the economy and the various sectors and securities in which we invest.
  • With the Fed indicating its intention to keep short rates depressed for the foreseeable future, we will continue to look to the ever-changing credit market for yield contribution. The incredible technical appears to be intact and although the Fed facilities have officially ended, the market has seen a paradigm shift in its willingness and ability to provide support which should continue to contribute to the healthy appetite for short-end spread product. Fiscal and monetary policies should further support the economy and businesses in which we invest. However, we remain mindful of some of the risks associated with a world awash in liquidity and will pay careful attention to trends in capital allocation policies, liability management and mergers and acquisitions for our corporate coverage.
  • 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 Dec. 31, 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.