Ivy Securian Core Bond Fund

Ivy Securian Core Bond Fund
06.30.19

Market Sector Update

  • Strong labor markets and a near record expansion are facing off against persistently weak inflation, decelerating growth and a possible earnings recession. Despite the U.S. economy’s stronger-than-expected gross domestic product (GDP) growth in the first quarter, data have been mostly disappointing in the second quarter.
  • Late cycle concerns, such as cost pressures, trade tensions and global uncertainty have taken their toll. These factors are pressuring corporate earnings, making a year-over-year decline likely for the second quarter in a row. On a brighter note, the labor picture remains exceptionally strong with the unemployment rate at 3.6% as of June 30, the lowest in nearly 50 years.
  • All asset classes have performed well to date in 2019 despite slowing growth and fears of a downturn. Ironically, the catalyst for the second quarter rally was increasing conviction that the U.S. Federal Reserve (Fed) will cut rates in the near term, prolonging the expansion.
  • Treasury bonds on the other hand seem to be pricing in an alarming slowdown. Yields fell across the curve with the 2-year U.S. Treasury Note leading the way down 50 basis points (bps), leaving it as 1.76%. This compares to a yield of 2.09% on the 3-month U.S. Treasury Bill, which is more directly tied to the federal funds rate. The 10-year U.S. Treasury Note yield fell 40 bps and now sits at 2.01%.
  • Corporate bonds produced very strong absolute returns and strong returns relative to Treasuries and structured securities. The high-grade sector has produced year to date returns of nearly 10%, with high grade- and high yieldcredit returning 4.48% and 2.45% in the second quarter, respectively. Excess returns for investment grade were over 1% in the quarter and have reached almost 4% year to date relative to Treasuries. Performance has been led by longerdated bonds in sectors considered less defensive, and more heavily indebted, such as telecommunications, subordinated banking, food and beverage and autos.

Portfolio Strategy

  • The Fund had a positive return for the quarter that was slightly less than the return of its benchmark.
  • The Fund’s overall exposure to corporate bonds increased very modestly during the quarter. We added exposure in the communications sector for the first time in a while; we have grown more comfortable with the deleveraging plans of the large wireless providers. We also increased exposure to the banking and utility sectors as we continue to see these as more defensive in nature relative to most industrial sectors. Exposure to the industrials sector fell, mostly in consumer cyclicals and energy.
  • In terms of interest rate exposure, the portfolio remains most exposed to credits in the utilities, insurance, energy and financials relative to the benchmark. The largest underweights in the corporate space are in communication services, information technology, capital goods and consumer non-cyclicals.
  • Structured exposure fell as a percentage of the Fund’s net asset value during the second quarter, primarily in assetbacked securities (ABS), non-agency mortgage-backed securities (MBS) and commercial-mortgage backed securities (CMBS.) We invested in Agency MBS as this sector remains very liquid and relatively attractive to Treasuries. The portfolio remains overweight ABS, CMBS and non-Agency MBS.
  • The relative overall duration of the Fund rose during the quarter and finished the period slightly short of its benchmark.

Outlook

  • We expect growth to slow but remain positive and close to potential in the second half of the year. While we don’t see an immediate catalyst for a recession and still believe it’s some time off, the economy’s margin of error is slim. While it’s almost certain that second quarter growth will mark a record for the longest U.S. economic expansion on record, market participants are clamoring for the Federal Reserve to cut rates to extend the run.
  • Event risk is elevated, heightening potential downside. The market seems increasingly dependent on the Fed navigating this softer patch perfectly. With market expectations so far ahead of the Fed’s rate guidance, a rate cut is likely to be a necessary condition for continued performance rather than a pleasant surprise. However, if the Fed commits to a path of “insurance cuts” geared to head off slower growth and promote inflation, the economy could extend its run.
  • We expect the Fed to begin to ease in the second half of 2019. The question will be if it’s fast enough and large enough to act as a tailwind for the markets. With some risk of a policy mistake and higher volatility, we are tempering our enthusiasm and maintaining what we consider a more defensive posture relative to our historical risk exposures.

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, 2019, 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.

All information is based on Class I shares.

The Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index, representing most U.S. traded investment grade bonds. It is not possible to invest directly in an index.

Duration is a measure of a security's price sensitivity to changes in interest rates. A fund with a longer average duration generally can be expected to be more sensitive to interest rate changes than a fund with a shorter average duration.

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 rates rise. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. 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.