Ivy VIP Limited-Term Bond

Ivy VIP Limited-Term Bond
03.31.18

Market Sector Update

  • Market volatility continued in the second quarter as U.S. Treasury yields continued their climb higher, and returns on spread products widened. The 2-year note rose 26 basis points in the quarter to 2.53% and the 10-year note rose 12 basis points to 2.86%.
  • The yield on the 10-year note reached a seven-year high of 3.13% in mid-May, following a hawkish speech by John Williams, who has since moved from the position as President of the San Francisco Federal Reserve (Fed) to his current role as the President of the New York Fed. He is now a more significant player on the monetary policy stage, because the New York Fed President is a permanent voting member of the Federal Open Market Committee. That yield above 3% proved fleeting as, just days later, the U.S. Treasury market enjoyed a huge flight-to-quality rally centered on worries about Italy, dropping the ten-year yield to 2.78%. While the trend has certainly been for yields to rise, they have been doing so in a roller coaster fashion.
  • The Bloomberg Barclays U.S. Corporate Bond Index, a gauge of domestic investment grade credit, posted its worst half-year return (-3.19%) since the first half of 2013. Not only was investment grade credit’s absolute performance ugly, its relative performance was also bad. Investment grade credit spreads are 31 basis points wider in the first six months of 2018, while high yield spreads are only 12 basis points wider and the S&P 500 Index is up for the year. Most believe this is technically due to decreased demand for credit products, rather than a predictor of an economic downturn.

Portfolio Strategy

  • As promised following the first quarter, we have made major adjustments to the portfolio. The allocation to corporate bonds is much smaller today than three months ago. Their underperformance in the first quarter, after two years of outperformance, was the reason for reducing exposure. Proceeds from the sales went into U.S. Treasury securities and cash, which is invested in very short-term commercial paper. We expect to continue reducing corporate bond exposure in the third quarter.

Outlook

  • The Fed hiked rates for the seventh time in this cycle in June. It came as no surprise. Most believe there will be at least one more hike and probably two hikes before year-end. The big unknown right now is trade, and how the tariffs and tweets and rhetoric between the U.S. and our trading partners will play out. Whether or not growth is impeded both domestically and globally may determine whether the Fed may need to slow down their expected pace of rate hikes.
  • The yield curve, the difference between the yield on the 10-year note and the 2-year note has been flattening for some time and finished the quarter at 33 basis points. This has also been causing some concern. Continued rate hikes should cause continued flattening of the curve. An inverted yield curve (where 2-year yields are higher than 10-year yields) generally precedes a recession by anywhere from six to 24 months. Right now, however, things look good. Company profits are doing well. The labor market is strong. Unemployment is low. Inflation is not an issue. We will keep monitoring the data for changes, but recession appears to be beyond the horizon.

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, 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.

The Standard & Poor's 500 Index is a market-capitalization-weighted index based of the of 500 largest U.S. publicly traded companies by market weight. The Bloomberg Barclays U.S. Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. Indexes are unmanaged and one cannot invest directly in any index.

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 Portfolio 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.