Ivy VIP Global Bond

09.30.19

Market Sector Update

  • Political conflicts and trade uncertainty continued to weigh on business sentiment leading to revisions of global and U.S. growth forecasts in 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 has dampened global growth and led to a coordinated central bank policy of easing monetary policies.
  • In the U.S., an escalation of tariffs has led to a decline in business confidence and a contraction in manufacturing. The normalization of the U.S. Federal Reserve’s (Fed) balance sheet ended in the quarter, with the Fed stating its intension to reinvest maturing U.S. Treasuries and mortgage-backed securities. The Fed announced it will start expanding its balance sheet to better align it with the size of nominal gross domestic product (GDP). It also cut the federal funds rate by 25 basis points (bps) in July and September.
  • In Europe, the European Central Bank (ECB) cut the deposit rate by 10 bps; introduced a two-tier system for banks on the penalty rate charged on idle cash worth six times their mandatory reserves; strengthened its forward guidance; and re-launched its assets purchaser program.
  • In China, the government started to implement a new round of policy initiatives in an effort to stimulate growth.
  • The U.S. yields on Treasuries declined as the market priced in slower growth and a more active Fed on short-term rates. Two-year Treasuries declined by 14 bps, while 10-year Treasuries declined by 28 bps. Credit spreads widened in investment grade, high yield and emerging markets over the course of the quarter.
  • By switching their focus from tight labor markets and accelerating wage growth to slowing economies and softening inflation expectations, we believe policymakers are trying to create a backdrop for lower volatility.

Portfolio Strategy

  • The Fund posted a slight negative return and underperformed its benchmark for the quarter. Most of the underperformance was attributable to the Fund’s exposure to Argentina. The surprise win by Alberto Fernandez (a less-than-market-friendly candidate) in the presidential primaries led to a repricing of Argentine default risk.
  • The U.S. dollar strengthened over the quarter against developed market currencies as the yen, pound and euro lost value. The Fund’s 97.5% U.S. dollar exposure contributed to relative performance.
  • We continue to seek opportunities to reduce volatility in the Fund. Additionally, we are maintaining a low duration strategy for the Fund as we feel it allows us a higher degree of certainty involving those companies in which we can invest.
  • We continue to hold a higher level of liquidity 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.
  • 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.
  • 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 remain stretched with balance sheets remaining levered. Softer global growth is concerning and leads us to be cautious 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 last quarter 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 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, 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.

Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of a portfolio and the variable insurance product. This and other important information is contained in the portfolio and variable insurance product prospectuses, which may be obtained at www.ivyinvestments.com, from a financial advisor, or by contacting the applicable insurance company. Read them carefully before investing.

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 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. 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.