Ivy VIP Limited-Term Bond

Ivy VIP Limited-Term Bond
03.31.18

Market Sector Update

  • The first quarter of 2018 saw the return of volatility to both the fixed income and equity markets. Many equity indices posted negative returns for the quarter. Most fixed income indices posted negative quarterly returns with the increase in U.S. Treasury yields and the widening in spreads in corporate bonds and U.S. agency mortgage products.
  • In February, both U.S. Treasuries and corporate bonds had negative returns. Fears of tighter policy from the U.S. Federal Reserve (Fed) and inflation caused higher U.S. Treasury yields and wider corporate spreads. The five-year U.S. Treasury note, which finished 2017 at 2.21% climbed as high as 2.70% during the quarter then ended the quarter at 2.56%.
  • While U.S. Treasury returns were positive in March, corporate bond spreads continued to widen, signaling that it wasn’t an inflation fear driving the divergence but fear of a potential slow-down in growth.
  • The Fed’s Open Market Committee (FOMC) raised the federal funds rate to the 1.50-1.75% range in March, which was the first meeting with new Fed Chair Jay Powell. This was Fed’s sixth rate hike since December 2015. The general consensus is there will be two more rate hikes this year. However, it wouldn’t be surprising for that number to increase to three if inflation starts percolating.

Portfolio Strategy

  • The overweight in investment-grade corporate bonds in the portfolio hurt performancefor the quarter, going from best asset class for 2017, to the worst asset class for both the portfolio and its index.
  • Duration was kept well below that of the benchmark, as yields rose significantly in the quarter.

Outlook

  • There are several things weighing on corporate bond spreads right now. Trade policy, tax policy, tariffs and tweets are impacting both the overall market and individual corporations. The economic data is still pretty good, although leverage in general in the corporate debt market is high. Margins have been decent, but unfortunately much of the improvement in margins is from cost cutting rather than increased sales.
  • We have lightened up some on credit and will continue to do so as there is currently too much uncertainty in the market to warrant the large overweight we have in place. We plan to sell corporate bonds and replace them with a combination of commercial paper, U.S. Treasuries, U.S. agencies, taxable municipal bonds and mortgage-backed securities.
  • We believe the Fed will continue raising rates at a measured pace, so we will continue to keep duration shorter than the benchmark.

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 March 31, 2018, 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.

Risk factors: As with any investment, the value of the Portfolio's shares will change, and you could lose money on your investment. An investment in the Portfolio 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 rate rise. 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.