Ivy Funds - Ivy Bond Fund Quarterly Commentary

Quarterly Fund Commentary

Ivy Bond Fund (prospectus)
June 30, 2010

Manager(s):
Thomas Houghton, CFA
David Land, CFA
Chris Sebald, CFA

Market Sector Update
Following generally positive first quarter economic news, a heightened sensitivity to risk returned in the second quarter across all asset classes and propelled bonds higher. Stocks and riskier assets fell, credit market spreads widened, and a drop in bond yields brought gains to the bond market. Several developments stirred investor worries. Government solvency issues in Europe pushed credit default spreads wider on most European countries. Despite agreement on a massive $1 trillion package of rescue financing orchestrated by the stronger European Union countries and International Monetary Federation, spreads on Greek bonds continued to rise past junk bond territory as Standard & Poor's and Moody's downgraded the country's debt to below investment grade. In addition to solvency challenges, austerity measures proposed by European governments could make slow growth conditions even worse. The U.S. economy continued to grow, but most signs pointed to a falloff in the growth rate. May new home sales fell to the lowest level since records began in 1963. Unemployment remains a problem. Inflation remains contained and is well below where the market feared it would be earlier this year. However, with concerns that growth will lessen in the future, the risk of deflation is on the horizon. Mortgage-backed securities performed relatively well. Investors expect low prepayment rates, anticipating that borrowers will be unable to refinance under current credit conditions. Alternatively, spreads on all non-government bonds widened as they underperformed government securities.

Portfolio Strategy
We're keeping risk in check, not yet increasing our corporate bond exposure. We reduced our exposure to banks and other financials on concerns that regulatory reform would drive spreads wider. We will likely wait for more certainty about the impact of reform before we can take a more positive view of the large bank sector. We also lowered our position in agency mortgage-backed securities. Prices for MBS are at all-time highs as prepayments remain low. Borrowers are unable to refinance because of underwater loans and other credit issues. Despite very low current prepayment rates it is difficult for us to see value in the current level of MBS prices and their exceedingly low yield advantage versus Treasuries.

Outlook
We are increasingly convinced this recovery will be on the slow side for growth. Leading indicators imply that a significant slowdown is likely in coming quarters. Additionally, we believe housing prices are apt to fall in the coming year or two and are preparing the fund to potentially withstand the possibility of this decline and its impact on financials, the consumers and the cyclical recovery. Although we remain concerned about risk in the near term, we're in favor of corporate bonds, and we still like some commercial mortgage-backed securities (CMBS) for the longer term. Manufactured housing securities also appear attractive, with little or no credit risk, attractive yield and fundamentally sound credit profiles.

Past performance is no guarantee of future results. The Ivy Funds are managed by Ivy Investment Management Company and distributed by its subsidiary, Ivy Funds Distributor, Inc. Waddell & Reed Financial, Inc., the ultimate parent company of Ivy Funds Distributor, Inc., acquired the investment advisor to the Ivy Funds in December 2002.

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