Voya High Yield Bond Fund Quarterly Commentary - 3Q26
Total return approach, investing in below investment grade corporate securities.
Portfolio review
HY bonds finished lower in the quarter. Earnings momentum remained exceptionally strong, with S&P 500 companies beating bottom-line expectations for the second quarter at a rate of 86%—the highest in five years. On the economic front, healthy business activity surveys, continued low initial jobless claims, and elevated third quarter gross domestic product (GDP) growth estimates were contrasted by softer-than-expected consumer confidence and rising inflation expectations. At the September Federal Open Market Committee (FOMC) meeting, the U.S. Federal Reserve raised its benchmark rate for the first time since 2023 with Chair Warsh stating, “inflation has been too high for too long.” Against this backdrop and amid strong economic growth, probabilities of additional rate hikes increased further and the 10-year U.S. Treasury yield rose 83 basis points (bp) to 5.27%.
The ICE BofA US High Yield Index faced pressure from a rising rate environment, returning –1.82% for the quarter and bringing year-to-date (YTD) performance to 0.04%. BB, B, and CCC rated bonds returned –1.86%, –1.30%, and –3.57%, respectively. Spreads widened to 312 bp from 275 bp, the average bond price fell to 93.89, and the market’s yield rose to 8.45%. All industries finished lower with healthcare, energy, and chemicals outperforming, while cable, telecommunications, and real estate underperformed. Trailing 12-month default rates finished the period at 2.68% (par) and 1.88% (issues). The upgrade and downgrade ratio increased to 1.4. Quarterly new issuance saw 82 issues priced, raising $96.4 billion in proceeds, bringing the YTD total to $283.3 billion. Mutual fund flows were estimated at –$3.7 billion.
For the quarter, the class I shares of the Fund underperformed the benchmark on a NAV basis. The sharp rise in interest rates and challenged security selection more than offset benefits from portfolio’s underweight to CCC rated bonds (which underperformed BB and B rated bonds) and allocation to convertible securities. Industries helping relative performance in the period included cable and satellite TV, steel producers and products, as well as forestry and paper. Security selection was the main source of strength in cable and satellite TV, driven by a lack of exposure to a cable television issuer and an overweight to a satellite broadcaster. An industry overweight had a favorable impact within steel producers and products, while an industry underweight aided performance in forestry and paper. Industries detracting the most from relative performance in the period were healthcare, support-services, and utilities. Both security selection and underweight positioning had adverse impacts within healthcare. Weakness in support-services was primarily attributable to positioning in issues from a supply chain solutions provider. An overweight allocation to issues from multiple electricity generation companies drove relative underperformance in utilities.
Current strategy and outlook
The economic outlook remains favorable with strong nominal GDP driven by massive artificial intelligence investment, pro-growth domestic policies, and durable consumption fueled by healthy household balance sheets and low unemployment. Some key risks include continued geopolitical uncertainties and U.S. midterm election results, in addition to the trajectories of inflation, monetary policy, and interest rates going forward.
The earnings outlook also remains favorable. Bottom-up estimates continue to trend higher due to better-than-expected results and guidance. Earnings catalysts include robust capital expenditure, operating leverage improvement, and productivity gains, among others. Weaker-than-expected demand, higher-than-expected expenses and costs, and elevated interest rates could impact profitability projections.
A positive macro backdrop and strong earnings expectations support a constructive outlook for risk assets. Furthermore, risk assets have historically outperformed safe havens, such as investment grade bonds, in rising interest rate environments. Lastly, given their defensive characteristics, non-traditional fixed income asset classes, including convertible securities and high yield bonds, can mitigate equity market volatility better than stocks, without sacrificing attractive total return potential.
The high yield market offers very attractive total return potential given its notable discount to face value and high coupon. With a lower duration, the asset class has held up much better than core bonds and remains on pace to finish the year with a positive return. Despite tighter spreads, investors are being compensated with a market yield of 8.45%1. At this level, the asset class can provide equity-like returns but with less volatility. Credit fundamentals, near-term refinancing obligations, and market composition point to a continued, below-average default rate environment, and if spreads widen further, the market’s starting yield is much more supportive than spread history alone may suggest.
Key Takeaways
High-yield (HY) bonds finished lower in the quarter.
For the period, the class I shares of the Fund underperformed the benchmark on a net asset value (NAV) basis.
The HY market offers very attractive total return potential given its notable discount to face value and high coupon.