Ivy VIP Limited-Term Bond

Ivy VIP Limited-Term Bond
06.30.17

Market Sector Update

  • The Federal Open Market Committee (FOMC) engaged in another 25 basis point tightening in the fed funds rate when they met June 14. This is the second rate hike of 2017 and the third in the past year, and it was highly anticipated by the market. The two-year note started the quarter at 1.26% but ended the quarter at 1.38%, just a few weeks after the rate hike.
  • There is more discussion about reducing the size of the Federal Reserve’s (Fed) $4 trillion balance sheet. There is no talk of selling securities, rather just tapering their replacement as they mature and pay down. We have seen some modest widening already in mortgage-backed securities spreads, especially those types widely held by the Fed.
  • European Central Bank (ECB) President Draghi gave a speech in late June which contained a notable change in tone. Much of his speech was spent dealing with the improving European economy and how inflation is being pushed lower by temporary factors. He stated that, if the economy were to continue to improve, it would be necessary to adjust policy gradually. Many feel he was setting the stage for an announcement in September that tapering of bond purchases by the ECB will begin in 2018, which would mark a major policy shift. Even though Europe is way behind the U.S. in terms of the tightening cycle, it would be another major central bank moving in the same direction as the Federal Reserve.

Portfolio Strategy

  • We reduced mortgage holdings in the first quarter and made some additional sales in this latest quarter to reduce exposure to the types of securities the Fed will no longer be buying. Our current agency mortgage pass-through exposure is approximately 3% of the fund.
  • We kept the portfolio duration close to, but short of, the benchmark throughout the quarter and maintain our overweight to investment grade credit, as we prefer to generate excess return through asset allocation and credit selection rather than duration bets.

Outlook

  • We expect the Fed to start its balance sheet reduction in the near future. We are in uncharted territory here, and it’s quite possible we will see choppy markets when it begins. We think it will have a greater effect on maturities longer than those in the limited-term portfolio, but we don’t know for sure.
  • The Federal Reserve would like to hike rates another 25 basis points this year. If the beginning of the balance sheet reduction process goes fairly smoothly and the market reaction is reasonable, the Fed will probably raise the fed funds rate another 25 basis points in December.
  • Hopes of increased domestic economic growth from fiscal policy have been diminishing as policymakers in Washington, D.C. have had difficulty repealing and replacing the Affordable Care Act and moving on to tackle tax reform. It would appear that if these things occur, they are more likely to generate growth in 2018 than they will this year.

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, 2017, 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.

IVY INVESTMENTS® refers to the investment management and investment advisory services offered by Ivy Investment Management Company, the financial services offered by Ivy Distributors, Inc., a FINRA member broker dealer and the distributor of IVY FUNDS® mutual funds and IVY VARIABLE INSURANCE PORTFOLIOS℠, and the financial services offered by their affiliates.

Risk factors: As with any portfolio, 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.