Market Sector Update

• Municipal bond market performance was driven primarily by supply/demand technical factors as well as the risk-on/ risk-off trade in the Treasury market during the first quarter.
• Defaults in the municipal bond asset class continue to be extremely rare and heavily concentrated in the high-yield category. However, we anticipate increased headline risk from old municipal bankruptcy filings as they work their way through the court system.
• In general, municipal credit quality has returned to pre-recession levels.
• High-grade yields increased modestly in the quarter although there was much volatility week to week and month to month. The municipal yield curve remains quite steep by historical measures.

Portfolio Strategy

• We are moving into a period of the year where, historically, the municipal market struggles as redemptions tend to escalate around tax time.
• While we expect issuers to remain austere, an unexpected increase in supply could prove problematic for the market to absorb and could potentially put upward pressure on rates.
• Recognizing that we continue to hover near the all-time market low in rates, we have moved the portfolio duration to a slightly defensive position versus our benchmark. We continue to maintain our overweight slant to spread product in the A-BBB range.
• We will continue to hold a larger percentage of bonds in longer maturities in an attempt to exploit the steep slope of the yield curve, and we will continue to place great emphasis on diversification, higher (overall) credit quality and yield curve positioning.
• As always, the Fund will actively seek to uncover relative value opportunities between states, sectors and different security structures, while simultaneously attempting to exploit opportunities presented by the shape and slope of the yield curve.

Outlook

• We remain confident that defaults will continue to be much lower than any other fixed-income alternatives, besides U.S. Treasuries.
• We expect heightened headline risk in Q2 as the municipal bond exemption will continue to be under attack in the press from time to time. We also expect negative headlines from old municipal bankruptcy cases working their way through the court systems and ultimate decisions influencing the actions of other struggling municipalities in the future.
• Increasing Treasury yields as a result of either increased inflation expectations, a change in Federal Reserve timetable on quantitative easing activities, or a rotation into a perceived more attractive asset class could put pressure on the municipal bond market.
• While it is certainly plausible that the long-running bull market in bonds might be over, it does not appear that this is the start of a violent bear market. Under the circumstances, we should not dismiss the possibility that interest rates could stay very low for a very long time. We will remain proactive and vigilant in assessing any risk to the portfolio from a change in inflation expectations, as monetary policy continues to be extraordinarily accommodative.

The opinions expressed in this commentary are those of the Fund’s manager and are current through March 31, 2013. The manager’s views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results.

Risk Factors. As with any mutual fund, 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 rates rise. The Fund may include a signif cant portion of its investments that will pay interest that is taxable under the Alternative Minimum Tax. These and other risks i are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.

Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus, or if available a summary prospectus, containing this and other information for the Ivy Funds, call your financial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully before investing.