Ivy VIP Global Bond

06.30.20

Market Sector Update

  • The market has witnessed a full credit cycle in one quarter. The credit spread on the Bloomberg Barclays U.S. Aggregate Credit Index is almost back to pre-COVID-19 levels after widening 230 basis points (bps) in the month of March. We have never seen a health crisis morph into an economic crisis by virtue of a government mandated full-stop shutdown.
  • The National Bureau of Economic Research recently declared that a recession began in February. A clean “V” shaped U.S. economic recovery is unlikely, and credit is likely to be at the mercy of COVID-19-related news; both negative and positive.
  • Although fixed-income investment returns have been generally positive year to date, yields have swung widely as markets reacted to the sudden halt in economic growth. The Federal Reserve’s (Fed) rapid short-term interest rate cuts and fiscal stimulus have been followed by a slight sign of an economic recovery.
  • The Fed and Congress have tried to fill the gap with direct funds to households and loans to businesses. Despite the massive relief, the outlook still suggests that the economy may take time to recover.

Portfolio Strategy

  • The Portfolio outperformed its benchmark and Morningstar peer group for the quarter. Most of the outperformance was attributable to the Portfolio’s exposure to credit. The dramatic response in both fiscal and monetary policies and the bending of the COVID-19 infection rate curve led to a massive rally in credit as investors speculated in a “V” shaped recovery.
  • With concern of a global recession abating, the U.S. dollar weakened over the quarter against developed market currencies such as the Australian and Canadian dollar, but was stable versus the British pound and euro.
  • We continue to seek opportunities to reduce volatility in the Portfolio. Additionally, we are maintaining a low-duration strategy for the Portfolio as we feel it allows us a higher degree of certainty involving those companies in which we can invest. With the compression on credit spreads back to more normalized levels, we are tending to move back to a defensive position by moving up in higher quality credit/companies at the expense of high-yield credits in emerging market countries.

Outlook

  • We believe short-term interest rates will stay near zero for the foreseeable future and that low inflation will keep a lid on long-term rates.
  • The U.S.’s sizable fiscal packages provide much needed income support for sidelined workers and financial support for businesses facing interrupted product demand and cash flows. However, the packages are not fiscal stimulus that will generate stronger growth.
  • The federal government will soon debate another fiscal stimulus bill, while states look to fill gaps in their budgets. This environment can lead to starts and stops in economic activity and wane on investor sentiment.
  • Demand for corporate credit remains intact, though recently decelerated from record-setting levels. Across the globe, fixed-income yields are staggeringly low, leaving investors few alternatives. The Fed has stepped in as a buyer in the U.S. investment-grade and high-yield markets, which we believe is likely to support current spread levels.
  • China was weak going into the crisis; its domestic demand had slowed sharply. Business fixed investments had decelerated materially, while growth in gross capital formation had been propped up by government infrastructure investment. Consumer and business debt levels were very high, which reduced the government’s flexibility to stimulate more.
  • Most emerging markets were not well positioned going into the pandemic. Poor economic performances have harmed finances. In some Latin American countries, misguided policies and poor leadership have created turmoil that had contributed to capital flight. Debt levels are relatively high, and in special cases like Turkey, are burdened by large amounts of U.S. dollar-denominated debt levels that are costly to service as their currencies weaken versus the dollar.
  • The other concern with emerging markets is the dramatic decline in the price of oil. This impact has dramatically reduced overall budgets in OPEC, Russia, Nigeria, Brazil, Mexico and other nations.
  • Finally, the tilt away from globalization that has been underway for about half of the decade is likely to be reinforced. We believe new factors stemming from COVID-19 will fuel the move further away globalization, which will change complex international supply chains, higher tariffs and potentially increased barriers to immigration.

The opinions expressed are those of the Portfolio’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.

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 Portfolio’s shares will change, and you could lose money on your investment. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the Portfolio 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. Loans (including loan assignments, loan participations and other loan instruments) carry other risks, including the risk of insolvency of the lending bank or other intermediary. Loans may be unsecured or not fully collateralized may be subject to restrictions on resale and sometimes trade infrequently on the secondary market. These and other risks are more fully described in the Portfolio’s prospectus.

Annuities are long-term financial products designed for retirement purposes. Annuity and life insurance guarantees are based on the financial strength and claims-paying ability of the issuing insurance company. The guarantees have no bearing on the performance of a variable investment option. Variable investment options are subject to market risk, including loss of principal. There are charges and expenses associated with annuities and variable life insurance products, including mortality and expense risk charges, management fees, administrative fees, expenses for optional riders and deferred sales charges for early withdrawals. Withdrawals before age 59 1/2 may be subject to a 10% IRS tax penalty and surrender charges may apply.