Ivy Municipal Bond Fund

Ivy Municipal Bond Fund
09.30.17

Market Sector Update

  • Municipal market performance was primarily driven by a continued tempering of overly optimistic Trump agenda expectations, which turned slightly more positive at quarter-end, as there was renewed optimism regarding passage of meaningful tax reform. Stronger U.S. and global economic data reported near the end of the third quarter reversed some of the pessimism that had been keeping interest rates depressed.
  • Defaults in the municipal bond asset class continue to be rare. While we anticipate increased headline risk from municipal issuers that have severely under-funded pensions and other post-retirement benefit obligations, we continue to believe that these problems are not systemic, and that they will remain isolated. In addition, we do not expect the widespread Puerto Rico defaults to negatively affect the investment-grade municipal bond market, as this is an outlier event.
  • Interest rates traded in a very narrow range, and the yield curve slope was virtually unchanged.

Portfolio Strategy

  • The Trump presidency is a potential market and economic game changer. His policies, if implemented, increase economic growth potential. While we believe that the recently reported softer inflation readings will be transitory, the market continues to be complacent and is trading as if the threat of future inflation will not be problematic.
  • Europe, China and Japan continue to run very stimulative monetary policy operations, which could continue to prevent U.S. rates from rising too far. While the United Kingdom decision to leave the European Union did result in additional monetary stimulus, the anticipated economic fallout from the decision has been very mild, to date. Geopolitical risk, especially with escalating tensions between the U.S. and North Korea, is the new normal and it will continue to elevate the potential for additional flight-to-quality investments.
  • Treasury and municipal rates remain at very low historical levels. The portfolio duration is currently slightly short to our benchmark. We continue to maintain our overweight slant to spread product in the A-BBB range.
  • We will continue to place emphasis on diversification, higher (overall) credit quality and yield curve positioning.

Outlook

  • We remain confident that municipal bond defaults will continue to be much lower than any other fixed-income alternatives, besides U.S. Treasuries.
  • While we believe that meaningful corporate and individual tax reform legislation will be passed, the defeat of the AHCA legislation and other more recent headwinds facing the Administration's ACA repeal and replace agenda has planted a seed of doubt in our minds. Regardless of the outcome on attempted tax reform and healthcare reform, we do not believe that the municipal tax exemption is in jeopardy, as the municipal market is the most efficient infrastructure financing vehicle in the U.S. and could be very instrumental in funding much of President Trump's projects,in addition to other funding sources. However, the tax code could be affected in ways that could make municipal bond interest less attractive to some buyers.
  • We expect to see continued headlines on municipal pension under-funding and other post-retirement benefits issues. We will remain vigilant in monitoring these situations and we will endeavor to avoid investments with these issuers.
  • We expect Treasury yields to be the primary driver of the investment-grade municipal market as we move intothe fourth quarter. Supply/demand technicals will continue to play a very important role in relative performance.
  • For several years we have felt that the 35+ year bull market was nearing an end. There is much uncertainty in the market, which continues to keep bond yields at very low levels. However, as the U.S. Federal Open Market Committee has begun to slowly raise the Fed Funds rate, global bond yields have been pulled modestly higher. The great "taper" is coming; the U.S. Federal Reserve, the European Central Bank and the Bank of England will begin to reduce the size of their bloated balance sheets in the not-too-distant future. Speculation surrounding President Trump's upcoming appointment for Federal Reserve chairperson position has added an additional layer of uncertainty to the market.
  • The big wild card moving forward is the Trump presidency. We continue to be disheartened by the hostility in Congress, and the opposition appears to be willing to do everything possible to prevent President Trump from being able to staff his White House and implement policy change. The distractions, obstacles, constant allegations and stonewalling faced by this administration may prove to be too large to overcome. We hold out hope that clearer heads will prevail and that positive changes can be implemented.

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 Sept. 30, 2017, 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.

Diversification and asset allocation are investment strategies that attempt to manage risk within your portfolio but do not guarantee profits or protect against loss in declining markets.

Risk factors: The value of the Fund's shares will change, and you could lose money by investing. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise. Investing in below-investment-grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may include a significant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax (AMT). Exempt-interest dividends the Fund pays may be subject to state and local income taxes. The portion of the dividends the Fund pays that is attributable to interest earned on U.S. government securities generally is not subject to those taxes, although distributions by the Fund to its shareholders of net realized gains on the sale of those securities are fully subject to those taxes. The municipal securities market generally, or certain municipal securities in particular, may be significantly affected by adverse political, legislative or regulatory changes or litigation at the Federal or state level. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.