Despite reduced optimism regarding the Trump administration’s pro-growth agenda, the economy
continues to perform smoothly with gross domestic product showing steady increases. Additionally, recent
upticks in employment, housing, and a strong lift in consumer confidence have led to increasingly positive
Even with legislative uncertainty, the big story in the
bond market this year has been that long-term rates have
fallen as expectations around growth and inflation have
been tempered. This, along with the Federal Reserve
(Fed) raising the federal funds rate, has contributed to a
significant flattening in the yield curve. At the end of the
third quarter, the spread between 30-year and 2-year bonds
was the flattest since September 1, 2016. Despite our bias
for higher rates, we think long term rates should remain low
by historical standards.
We believe the current credit cycle will be prolonged
with a continued low-rate environment and strong
demand for corporate bonds from both domestic and
international buyers searching for yield in a low growth,
low rate world. Slow and steady economic growth and
low inflation are good ingredients for non-government bond sector performance. Overall, the moderate growth
backdrop should continue, which is positive for the current
Staying selective amidst mixed signals
The current economic backdrop requires heightened risk-awareness
and a disciplined investment process. Macro
viewpoints help inform and guide sector selection, but
security selection through bottom-up analysis is the
foremost alpha driver of our investment process. Disciplined
analysis has served us well in identifying relative value
plus identifying positive catalysts that we believe will drive
ratings upgrades and capital return. Our comprehensive
approach in researching credits gives us a granular
understanding of each opportunity, which is critical in a
credit cycle with mixed signals.
Current credit cycle indicators
As shown in the chart below, the investment team reviews multiple market factors when determining the future investment
trajectory of the Fund. This chart illustrates the areas they review, along with the current quarter-end results of that
review. The current environment doesn’t line up easily to indicators from previous cycles and has not offered many clear
indications of what to expect.
Focus on financials and industrials
We are maintaining a significant overweight in corporate
credit, as we see the most acceptable levels of risk and reward
within this area. In particular, we are finding attractive
opportunities in the financials and industrials sectors. We
believe the financials sector is poised for continued earnings
growth and will maintain a stable credit profile with strong
balance sheets and decreasing regulatory burdens. Recently,
we added to our exposure in financials, all within the
insurance space. We think this sector will outperform as we
move farther along through this credit cycle.
We favor the periphery of the industrial sector, in particular
within energy and airlines. For instance, the Fund holds
Master Limited Partnerships (MLPs) that own pipelines that
transport oil. MLPs are particularly attractive right now, as
they have relatively stable contracts with already agreed upon
prices to move oil through the pipelines. The partnerships have
more volume-driven revenue than commodity-driven revenue,
so while the price of oil may fluctuate, the revenue from
moving it does not.
Additionally, we are finding relatively attractive yields in
airline enhanced equipment trust certificates (EETC).
EETCs are securities designed to provide airlines a source
of financing for aircrafts. The EETC is guaranteed by
the airline, plus it is backed by collateral in the form of the
airplanes, so if an airline goes through bankruptcy, they
must reaffirm all leases on the planes. The attractiveness of
yields and overall structure of EETCs are an important part
of the portfolio.
Diversifying with structured securities
While we are overweight corporate credit, we are also
diversifying our portfolio by tactically adjusting our structured
security allocation. For example, the underwriting within
the commercial real estate space is the strongest we have
seen in years, so we are overweight commercial mortgage
backed securities. This is further supported by the strong
fundamentals for commercial real estate, office buildings and
warehouses, which are expected to maintain solid rent growth.
And while we are broadly underweight agency mortgagebacked
securities, we are finding opportunities in the space
through Credit Risk Transfer (CRT) securities. In 2013,
these securities were created to transfer portions of risk
from conventional residential mortgage loans backed by
government-sponsored enterprises, such as Fannie Mae and
Freddie Mac, to private sector investors. These securities
provide an opportunity to increase the yield on the portfolio
by assuming credit risk on loans made to high-quality
homebuyers. The CRTs offer benefits within our portfolio,
including borrowers with excellent credit scores, geographically
diverse home ownership base, floating rate security benefits
from a rise in interest rates, and gaining exposure to consumer
credit diversified from corporate credit.
We believe that the markets will see moderate growth in the
near-term but that rates will stay below the long-term averages.
We expect policy changes will come from the administration
and Congress to boost growth, but those changes are likely
to be later than originally anticipated. Coupled with a
more robust global growth outlook, this should be a good
combination over the next 12 months.
We remain optimistic about the prospect for economic growth
above 2% for the rest of 2017. The likelihood of continued
business investments remains high, as reflected by the elevated
readings in small and large business optimism. We expect
the Fed to raise interest rates again this year and to begin
scaling back its bond-buying program by re-investing less of the
portfolio that matures.
Given the variability of economic signals, we think it is critical
to evaluate the numerous factors influencing today’s market. In
mixed environments, we believe our active, risk-aware investment
process can offer stability in otherwise uncertain times.
Ivy Advantus Bond Fund sector weightings
As evidenced by the charts below, the Fund has certain areas where it stays relatively close to the benchmark when investing - such
as CMOs or sovereign debt - but also varies when our research tells us to. The allocations shown are the end result of the reviews
discussed earlier and our upcoming outlook for this sector.
Past performance is no guarantee of future results. 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 November 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.
The Ivy Bond Fund was renamed Ivy Advantus Bond Fund on April 3, 2017.
Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. An investment in the Fund 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 rates rise. Investing in below investment grade
securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at
all broker/ dealers.