Voya Core Plus Fixed Income SMA Quarterly Commentary - 3Q25

The third quarter of 2025 marked a pivotal shift in the economic narrative, as the labor market—long a pillar of resilience—began to show signs of strain. Early in the quarter, the June nonfarm payrolls (NFP) report surprised to the upside, showing 147,000 jobs added and unemployment dipping to 4.1%. However, this apparent strength proved short-lived. By quarter end, payroll data had been revised sharply lower, revealing a trend closer to 30,000 jobs—well below breakeven—and an outright decline in June. These developments prompted the Fed to resume rate cuts at its September meeting, with the updated dot plot signaling two additional cuts by year end and a more dovish outlook into 2026.

Fed Chair Jerome Powell’s remarks at Jackson Hole underscored the fragility of the current labor market equilibrium. He noted that slowing demand was being offset by a decline in labor force participation and immigration, creating a delicate balance that could unravel quickly if layoffs accelerate. This dynamic has helped contain wage pressures, but it also introduces new risks to growth. Meanwhile, inflation remained stubbornly above the Fed’s 2% target, with core Personal Consumption Expenditures Price Index (PCE) rising to 2.9% by quarter end. Notably, core goods inflation accelerated, suggesting that tariff-related pass-through effects are beginning to materialize. 

Trade policy developments added further complexity. On July 13, 2025, President Trump announced a 30% tariff on goods from the European union and Mexico, effective August 1, 2025. Market reaction was muted, likely due to the limited scope of the tariffs and the absence of immediate retaliation. Subsequent trade deals with Japan and the EU helped ease tensions, lowering tariffs from “Liberation Day” levels to 15% and including commitments for foreign investment and increased U.S. imports. 

Financial markets responded constructively to the evolving macro backdrop. Rates rallied across the curve, led by the front end, while credit spreads continued to tighten, reflecting investor confidence in the Fed’s pivot and the relative stability of corporate and consumer fundamental factors. As a result, most fixed income sectors delivered positive total and excess returns. 

For the quarter, The Voya Core Plus Fixed Income SMA underperformed the Index on both a gross- and net-of-fees basis. An underweight in Treasuries in favor of credit contributed to relative performance, but this was outweighed by our underweight in agency mortgage-backed securities (MBS) as the sector benefitted from falling rate volatility. Similarly, our shorter duration profile detracted as rates ended the quarter lower. Security selection results were mixed, but on balance had a positive impact on relative performance. Selections within investment grade detracted due to our bias towards higher quality, while selections within commercial mortgage-backed securities (CMBS) and asset backed securities (ABS), where we hold higher yielding, off-benchmark positions, contributed.

As we enter the final quarter of 2025, the economic landscape remains shaped by a complex interplay of policy shifts, labor market dynamics, and inflation pressures. Our base case anticipates U.S. growth to remain positive but below potential—likely hovering slightly above 1%—as consumers face the headwinds from newly implemented tariffs. However, we think companies may absorb some of the tariff cost, thanks to tailwinds from deregulation and fiscal stimulus via the One Big Beautiful Bill Act (OBBB Act), which delivers $300 billion in tax relief. While growth is expected to slow, the economy remains supported by easy financial conditions and targeted fiscal spending abroad, particularly on infrastructure and defense. 

Inflation remains a focal point, with mixed signals emerging. Tariff passthrough to consumer prices has been more muted than anticipated, and data shows disinflationary trends in services. This is supportive of our view that tariffs function more like taxes—dampening demand rather than fueling price increases. However, risks persist. The potential for renewed wage pressures, driven by declining immigration and labor force participation, and delayed tariff effects could keep inflation anchored above 3%. The Fed, acknowledging the fragility of the labor market and limited inflation passthrough thus far, has resumed rate cuts and signaled a gradual, data dependent easing path. With fed funds still above neutral, policymakers retain flexibility to respond if conditions deteriorate more quickly than expected. 

For fixed income markets, we maintain a cautiously constructive outlook. Yields remain elevated, despite a weakening labor market and a dovish Fed, which allows fixed income to deliver positive returns under a range of potential scenarios. Corporate fundamental factors remain strong, so while further spread tightening appears unlikely, outperformance can still be realized through higher carry. To manage this, we maintain a bias towards shorter dated bonds which offer similar spreads but are less sensitive to spread volatility. We continue to favor securitized credit, especially CMBS, which is early in its credit cycle and continues to see strong primary market activity. As of quarter end, our CMBS allocation stood at roughly 6%, which translates to a 5% overweight. Agency MBS, having delivered solid outperformance during the quarter, now appears relatively less attractive. Because of this, we are happy to maintain our underweight. As the macro environment evolves, we continue to emphasize sector allocation and security selection to deliver outperformance for our clients.