Voya Enhanced Yield Fixed Income SMA Quarterly Commentary - 1Q25
A total return strategy that uses a multi-sector approach with a higher-quality posture through the use of Treasury, agency and corporate credit securities, both investment-grade and below, with 1-10 year maturities.
Market review
The first quarter of 2025 was marked by volatility in the fixed income markets, primarily driven by tariff policies and associated economic uncertainty. Despite robust job gains and a low unemployment rate, fixed income spreads widened, leading to broadly negative excess returns. Credit spreads began to widen in mid-February when tariff threats intensified. Investment grade (IG) corporates delivered negative excess returns, as did high yield (HY) corporates, although the higher carry profile of HY helped the sector modestly outperform its IG counterpart.
The labor market remained strong, with job gains averaging around 200,000 per month and an unemployment rate only slightly above 4%. However, tariff policies were the primary driver of market moves. The uncertainty surrounding these tariffs, along with the potential for an escalating trade war, negatively impacted risk assets. Similarly, rates fell during the quarter in response to lower growth expectations, which helped deliver positive total returns for most sectors.
The U.S. Federal Reserve maintained a cautious stance during the quarter. The Fed cited stronger than expected economic data as reasons for not cutting rates further. However, in response to tariffs, the updated Summary of Economic Projections (SEP) released following the March meeting showed the median projection for growth moving lower, while inflation projections were higher; however, there was no change to rate expectations, with the median projection still indicating one to two cuts through year end.
Portfolio review
For the quarter, the Voya Enhanced Yield Income SMA outperformed the custom benchmark on a gross-of-fees basis but underperformed on a net-of-fees basis. The SMA's higher quality focus within both IG and HY corporates was the primary contributor to relative performance, as higher quality generally held up better in the volatile market environment.
Outlook
Looking ahead, fundamental factors remain supportive. Growth has been roughly 2–3% for the last three years, most recently delivering 2.5% in 4Q24. The labor market is healthy with only 4.1% unemployment. And on the consumer side, balance sheets remain healthy.
That said, survey data has indicated tariffs have negatively impacted both business and consumer sentiment. We have already seen consumers pull back (negative growth numbers in both Personal Consumption Expenditures Price Index (PCE) and retail sales numbers for January) and we will likely see a similar reaction on the business investment side. Even if tariffs are watered down, the associated uncertainty will remain a headwind.
That said, while a recession is not our base case, the probability has clearly increased. While there will likely be an impact on personal consumption and investment, household and corporate balance sheets still remain healthy. In addition, the downside to growth should be limited as the Fed has the room to cut rates, especially if employment numbers weaken. However, much depends on how much, and for how long, the announced tariffs remain in place.
Over the past several quarters, we have been constructive on fundamental factors, but believed valuations were ignoring potential risks. As a result, we came into the quarter positioned with a higher quality bias. While spreads have widened, the macro-outlook has clearly weakened. We continue to remain cautious in our positioning and prefer high-quality assets, while we will look to add market risk should spreads widen further.
Key Takeaways
The first quarter of 2025 was marked by volatility in the fixed income markets, primarily driven by tariff policies and associated economic uncertainty. Despite robust job gains and a low unemployment rate, fixed income spreads widened, leading to broadly negative excess returns.
For the quarter, the Voya Enhanced Yield Income SMA outperformed the custom benchmark on a gross-of-fees basis but underperformed on a net-of-fees basis.
Looking ahead, fundamental factors remain supportive due to positive expected growth, a healthy labor market and resilient consumer.