Voya Intermediate Bond Fund Quarterly Commentary - 2Q22

Voya Intermediate Bond Fund Quarterly Commentary - 2Q22

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Total return approach, investing across full spectrum of the fixed income market including up to 20% in below investment-grade securities.

Dynamic Core Bond Strategy

Key Takeaways

  • For the quarter, on a net asset value (NAV) basis, the Strategy’s class I shares underperformed the benchmark, the Bloomberg U.S. Aggregate index (the “index”).
  • Sector allocation weighed the most on performance. Security selection also detracted, while duration and yield curve positioning did not impact performance.
  • Allocations across corporate credit as well as many securitized credit sectors were reduced during the quarter, reflecting a desire to reduce risk and increase liquidity.
  • The Strategy remains underweight U.S. Treasuries and neutral agency residential mortgage-backed securities (RMBS), while allocating risk across the corporate and securitized credit spectrum.

Portfolio Review

The 2Q22 was largely a continuation of 1Q22. Growth was slower than expected, inflation persisted, and Treasury yields continued to climb. A key difference was that in 1Q22, the rising rates were driven partially by a rise in inflation expectations while in 2Q22, the continued rise in rates was driven entirely by Federal Reserve (the “Fed”) hawkishness, since they, and the market, believe that inflation will move lower but will still be above their target.

Coming into the quarter, credit spreads were trending tighter, off their recent wides. The sell-off quickly resumed as incoming data pointed to slower growth. For example, retail sales turned negative in May and new and existing home sales have declined materially. But the Fed, while not ignoring weaker data, remained focused on combatting inflation and continued to raise the Fed funds rate, including a 0.75% at their June meeting. At the same time, the projection for the year end Fed funds rate, as indicated by the dot plot, went from 1.9% in March to 3.4% in June. In response to this sell-off, many corporate issuers, both investment-grade (IG) and high-yield (HY), choose to hold-off on new debt issuance. In HY specifically, some issuers even choose to buy back some of their existing debt as discounts became extreme. In commercial mortgage-backed securities (CMBS), while delinquencies continued to fall, this did not prevent spreads from widening as the overall risk-off sentiment overwhelmed the positive fundamentals. In fact, fundamentals across securitized credit subsectors remained strong as consumers, although facing higher prices, continue to be well supported by a tight-labor market, excess savings and increased home equity. One exception to this is the subprime space where consumers are more adversely affected by rising costs. Agency mortgage-backed securities (MBS) also struggled. This was driven almost entirely by fears of the reduction in the Fed’s holdings of MBS, which weighed most heavily on lower coupons. The good news for investors is that the prospect for the Fed selling MBS securities in 2022 has meaningfully decreased, with the risk of being discounted by markets.

During the quarter, changes to the portfolio in large part, reflected our preference to reduce risk and increase liquidity. Allocations across corporate credit as well as many securitized credit sectors were reduced during the quarter. We added to agency MBS, which was also a risk reduction, as our allocations became more in line with the benchmark and reflected our view that markets had largely discounted risks associated with balance sheet reduction by the Fed.

Even though we did reduce risk, with spreads wider, sector allocation weighed on performance for the period. In aggregate, our overweights in corporate and securitized sectors versus U.S. Treasurys were headwinds amidst the continued riskoff sentiment. While most sector allocations detracted, our overweight to asset-backed securities (ABS) contributed during the quarter, reflecting the sector’s lower beta characteristics, and positioning in agency MBS which included an increase in allocations during the quarter, modestly added. In security selection, negative contributions within ABS largely reflected allocations to higher-yielding collateralized loan obligations (CLOs), emerging-markets (EM) sovereigns and corporates that included Russian exposure also detracted, as did selection within IG corporates. This was offset by positive security selection within agency MBS — which included collateralized mortgage obligations (CMOs), and positive idiosyncratic news on selected CMBS. Duration and yield curve positioning which started the period with a defensive tilt and then move to neutral did not meaningfully impact performance.

Current Strategy and Outlook

For the second half of the year, it is important to keep an eye on the supply side. There are early signs supply chain bottle necks are easing and along with the declines in key commodity prices, this could take some pressure off the Fed. If these trends don’t continue, it’s possible the Fed could tighten past neutral in trying to avoid a 1970s type error, when the Fed reversed course prematurely in response to recession and set the stage for an inflation surge in the late 1970s. While some areas of the market may have some long-term value, currently we do not believe spreads are properly discounting the short-term risks associated with the market debate on the risk for a recession. As a result, we are being patient with the liquidity we have built year-to-date (YTD), and will continue to monitor the market for tactical opportunities.

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The Bloomberg Barclays U.S. Aggregate Bond Index is a widely recognized, unmanaged index of publicly issued investment grade U.S. Government, mortgage-backed, asset-backed and corporate debt securities. The Index does not reflect fees, brokerage commissions, taxes or other expenses of investing. Investors cannot invest directly in an index.

Principal Risks: All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield. High-Yield Securities, or “junk bonds,” are rated lower than investment-grade bonds because there is a greater possibility that the issuer may be unable to make interest and principal payments on those securities. To the extent that the Fund invests in Mortgage-Related Securities, its exposure to prepayment and extension risks may be greater than investments in other fixed-income securities. The Fund may use Derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses and have a potentially large impact on Fund performance. Foreign Investing poses special risks including currency fluctuation, economic and political risks not found in investments that are solely domestic. As Interest Rates rise, bond prices fall, reducing the value of the Fund’s share price. Other risks of the Fund include but are not limited to: Credit Risks, Extension Risks, Investment Models Risks, Municipal Securities Risks, Other Investment Companies’ Risks, Prepayment Risks, Price Volatility Risks, U.S. Government Securities and Obligations Risks, Debt Risks, Liquidity Risks, Portfolio Turnover Risks, and Securities Lending Risks. An investment in the Fund is not a bank deposit and is not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.

The strategy employs a quantitative model to execute the strategy. Data imprecision, software or other technology malfunctions, programming inaccuracies and similar circumstances may impair the performance of these systems, which may negatively affect performance. Furthermore, there can be no assurance that the quantitative models used in managing the strategy will perform as anticipated or enable the strategy to achieve its objective.

The strategy is available as a mutual fund or variable portfolio. The mutual fund may be available to you as part of your employer sponsored retirement plan. There may be additional plan level fees resulting in personal performance that varies from stated performance. Please call your benefits office for more information.

Variable annuities and group annuities are long-term investments designed for retirement purposes. If withdrawals are taken prior to age 59½, an IRS 10% premature distribution penalty tax may apply. Money taken from the annuity will be taxed as ordinary income in the year the money is distributed. An annuity does not provide any additional tax deferral benefit, as tax deferral is provided by the plan. Annuities may be subject to additional fees and expenses to which other tax-qualified funding vehicles may not be subject. However, an annuity does provide other features and benefits, such as lifetime income payments and death benefits, which may be valuable to you.

Variable investments, of any kind, are not guaranteed and are subject to investment risk including the possible loss of principal. The investment return and principal value of the security will fluctuate so that when redeemed, it may be worth more or less than the original investment. In addition, there is no guarantee that any variable investment option will meet its stated objective. All guarantees are based on the financial strength and claims paying ability of the issuing insurance company, who is solely responsible for all obligations under its policies.

Insurance products, annuities and funding agreements issued by Voya Retirement Insurance and Annuity Company (“VRIAC”), One Orange Way, Windsor, CT 06095, which is solely responsible for meeting its obligations. Plan administrative services provided by VRIAC or Voya Institutional Plan Services, LLC (“VIPS”). Securities distributed by or offered through Voya Financial Partners, LLC (“VFP”) (member SIPC)or other broker-dealers with which it has a selling agreement. Only Voya Retirement Insurance and Annuity Company is admitted and can issue products in the state of New York. All companies are members of Voya Financial.

This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. Past performance is no guarantee of future results.

The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Portfolio holdings are fluid and are subject to daily change based on market conditions and other factors

 

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