Quarterly Fund Commentary

Ivy Municipal Bond Fund (prospectus)
June 30, 2010

Manager(s):
Bryan Bailey, CFA

Market Sector Update
The municipal bond market continues to wrestle with high levels of negative headline and political risk. Once again, the asset class successfully navigated these headwinds to post positive total returns for the quarter. Despite all of the negative headlines, the cumulative default rate for the municipal bond asset class has been approximately 70 basis points since July 2009. All but one of the defaults was in the high-yield category. Admittedly, there is pressure on some local, city, and county issuers and we expect many states to continue to push their problems down to the local level. Essential service revenue bonds continue to perform very well with little noticeable credit erosion. Retail demand for municipal bonds continues to be very robust. High-grade yields decreased modestly across the entire yield curve, with the largest declines in maturities between five and 15 years. Spread product outperformed as credit spreads continued to tighten, volatility declined and liquidity was at a high level. The municipal yield curve remains quite steep by historical measures.

Portfolio Strategy
The favorable market acceptance of the Build America Bond (BAB) program (part of President Obama's American Reinvestment and Recovery Act legislation) has reduced the supply of tax-free bonds, especially longer dated maturities. This supply/demand imbalance has resulted in outperformance of the long end of the municipal market. Because we have structured the funds defensively with bonds that we expect will have a higher level of liquidity, we believe that we are in a position to redeploy some of these holdings as opportunities present themselves. We have become slightly more aggressive by moving a larger percentage of our holdings into longer maturities in an attempt to exploit the steep slope of the yield curve. We have also increased our exposure to spread product in the A-BBB range, as spread product continues to be relatively attractive. We will continue to place great emphasis on diversification, higher (overall) credit quality and yield curve positioning. As always, the fund will actively seek to uncover relative value opportunities between states, sectors and different security structures, while simultaneously attempting to exploit opportunities presented by the shape and slope of the yield curve. We will continue to monitor opportunities presented by lower quality bonds if/when spreads widen to our value targets.

Outlook
While the aggressive monetary and fiscal stimulus efforts have stabilized the economy, we remain concerned that the positive impacts of these programs may be reversed to some degree when the stimulus ends. This continues to be a very difficult period, and we believe that the salad days of the bond market are behind us. We think that long-term interest rates had reached unreasonably low levels in the last five years as a result of easy money and an extensive use of leverage. Also contributing to low interest rates was recent Federal Reserve intervention and unconventional use of its balance sheet. We believe these low rate levels are not sustainable in the long run. We think that the seeds are being sown for a significant bout of inflation as monetary policy had been unusually accommodative for an extended period of time, and policy is extremely accommodative once again. Inflation is not on the immediate horizon, but if it materializes it will eventually put upward pressure on long-term interest rates. Therefore, we believe that a slightly aggressive stance on interest rates is warranted, and we are a little more willing to increase the portfolio exposure to interest-rate risk.