Ivy VIP Global Bond

Ivy VIP Global Bond
06.30.19

Market Sector Update

  • Rising political conflicts and uncertainty weighed on business sentiment leading to below trend gross domestic product (GDP) growth during the quarter. The macro environment softened with growth slowing in the U.S., Europe and China. The escalating trade war concerns between the U.S. and China left central banks set to ease policy in response to weakening data. Policy makers took a sharp turn from hawkish to dovish with the weakening fundamentals.
  • In the U.S., the market has priced two to three rate cuts by the Federal Open Market Committee for the remainder of 2019. In Europe, the European Central Bank (ECB) has signaled its willingness to cut rates and potentially restart its purchase of corporate bonds. And finally, in China, the government has started to implement a new round of policy initiatives in an effort to stimulate growth.
  • The normalization of the U.S. Federal Reserve’s (Fed) balance sheet is also winding down as the Fed slows down the pace of decline in the balance sheet to a level consistent with believed efficient and effective policy implementation.
  • The yield curve inverted as the market brought down expectations of the Fed’s tightening policy and overall expectations of a slower global growth environment. The 10-year U.S. Treasury declined 40 basis points while the 2- year U.S. Treasury declined 51 basis points.
  • By switching their focus from tight labor markets and accelerating wage growth to slowing economies and softening inflation expectations, policymakers are trying to create a backdrop for lower volatility.

Portfolio Strategy

  • The Portfolio had a positive return and performed in line with its benchmark for the quarter. The market’s reaction to the potential global ease in monetary policy led to a rally in both short- and long-duration Treasuries.
  • The U.S. dollar slightly weakened over the quarter against developed market currencies as the yen and euro gained 2.79% and 1.38%, respectively. The Portfolio’s 97.5% U.S. dollar exposure hurt performance relative to peers.
  • 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.
  • We continue to focus on maintaining proper diversification for the Portfolio. We continue to hold a higher level of liquidity (patient capital) because of structural changes in the capital markets. We will be opportunistic in allocating that capital when we believe dislocations in the market arise.

Outlook

  • We expect most major economies to grow at a slower pace for the remainder of the year. Global manufacturing and service sector businesses report weaker conditions today than in recent times.
  • Trade war rhetoric and complicated political concerns like the ongoing Brexit saga, European auto tariffs and the U.S. presidential debates will likely mean that global interest rates and credit markets will continue to exhibit volatility in the near term. We believe trade will continue to be a risk factor going forward. There is the potential for more tariffs, followed by retaliatory action that might impact company capital investment plans. A negative feedback loop might impact markets, stocks and ultimately consumer and business confidence.
  • Fundamentals in the credit markets continue to remain stretched with balance sheets remaining levered. Softer global growth is concerning and leads us to be cautionary on the outlook for credit spreads. Technicals in credit can be supported with investors’ expectations that the ECB will resume corporate bond purchases.
  • Given our expectation for modest widening of spreads during the second half of 2019, we believe our conservative positioning relative to the benchmark is appropriate. We will be opportunistic about our credit selection and overall positioning to take advantage of perceived opportunities and dislocations as they present themselves.
  • The U.S. Federal budget deficit is expected to rise to $1.0 trillion (4.7% of GDP) in 2019 from structural forces which have deteriorated by a much greater amount than the offsetting cyclical improvement.

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, 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.

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

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.