Quarterly Fund Commentary

Ivy Limited-Term Bond Fund (prospectus)
June 30, 2010

Manager(s):
Mark Otterstrom, CFA

Market Sector Update
As the U.S. economic recovery has slowed, growing fears are that the country may fall back into a recession. This fear has manifested itself with 10-year Treasury yields dropping below 3 percent and lower rates on five- and 10-year Treasuries. The bond market reflects investors becoming more risk averse over the last few months. Financial troubles in Greece and other euro zone countries have lead to a renewed flight to quality trade in the United States. Mortgage debt spreads have tightened significantly due to a lack of supply and strong demand from mortgage investors. At the same time, record low mortgage rates have done little to spur home purchases. Buying a home has become less of an affordable-interest-rate decision and more of a job and sustainable-income decision. Subsequently, we won't see a marked improvement in home sales until there's a more robust rebound in job growth and likely lower unemployment. Two bright spots on the employment front: temporary help, a leading indicator for full-time employment, continues to see healthy growth; and average hourly earnings rose to a record high during June. However, any U.S. recovery will be derailed without an increase in payrolls, hours worked and job growth. The United States continues to run an unsustainable deficit which is leading to continued growth in debt issuance. While there are many reasons for Treasury rates to be higher, the flight to quality trade into Treasury debt from global investors has been overwhelming. With the European Union recovery stretching over multiple quarters there is not much on the horizon to change the current attraction to Treasury bonds. However, if economic indicators in the United States improve and the fear of a double dip dissipates, then Treasury rates could increase as quickly as they fell. After tightening for much of the last year, corporate credit spreads widened over the last two months due to concerns a global slowdown could greatly reduce profitability over the second half of the year. If the market begins to believe that the recovery is sustainable, then credit spreads should resume their tightening trends.

Portfolio Strategy
Substantial cash continues to flow into fixed-income mutual funds. The lowest rated corporate bonds have seen the highest total returns year to date. However, these assets were also the hardest hit during the credit collapse in 2008. We continue to maintain a very high-grade portfolio. We are underweight our benchmark in Treasury, agency and agency-backed mortgage debt. We are substantially overweight corporate debt. We have lengthened our duration so it is slightly less than our benchmark duration. We are overweight the middle of the yield curve in an attempt to take advantage of a steep yield curve. We will continue to look for opportunities to add lower grade bonds to the portfolio when we believe we are being compensated for the added risk.

Outlook
As the flight to quality trade was overtaking the market we lengthened the fund duration. With the potential of a prolonged global slowdown on the horizon, we will cautiously add longer duration bonds to the portfolio. We have seen a recent widening of credit spreads to relatively attractive levels. If we do not see additional weakness or a significant down draft to the U.S. economy, then credit spreads could see a healthy rally from their current levels. We believe that until the Fed changes its monetary policy and begins to raise rates, the short end of the curve will act as an anchor for the long end. The yield curve remains steep and we believe offers some value at the middle of the curve. As the Fed retreats from the mortgage market and spreads widen we will look for opportunities to add to our agency-backed mortgage debt. As credit markets have stabilized, we continue to increase our exposure to spread product.