Voya Securitized Credit Fund Quarterly Commentary - 3Q25

The third quarter of 2025 marked a turning point for the U.S. economy, as cracks in the labor market began to surface after several quarters of resilience. The June jobs report initially appeared strong, but a series of revisions later revealed a net decline during the month, and a much softer trend in subsequent months. This shift prompted the Fed to resume rate cuts at its September meeting, with projections indicating further easing through year-end. Fed Chair Jerome Powell’s Jackson Hole remarks emphasized a fragile labor market equilibrium—where decline in hiring is being offset by reduced labor force participation and a decline in immigration. Powell cautioned that this balance could unravel swiftly if layoffs accelerate, underscoring the Fed’s renewed dovish stance.

Trade policy continued to shape inflation dynamics, with the pause on reciprocal tariffs coming to an end in July and partial rollbacks via deals with Japan and the European union later in the month. Meanwhile, inflation data released during the quarter began to indicate the first signs of pass through to consumers, with inflation (particularly core goods inflation) rising month over month. Despite these headwinds, financial markets continued to reflect investor optimism. Rates rallied, led by the front end of the curve, and credit spreads tightened across sectors. As a result, most fixed income sectors delivered positive total and excess returns. 

Agency residential mortgage-backed securities (RMBS) stood out as the leading source of excess returns in the Bloomberg Securitized Index. Agency RMBS outperformed Treasuries by 83 basis points (bp), representing the third highest quarterly result of the past decade. This sector benefited from a confluence of favorable market conditions: the Fed’s first rate cut of the year, a drop in rate volatility, and a steeper yield curve. Additionally, speculation around quantitative easing further supported the rally. 

Within securitized credit, our allocation to commercial mortgage-backed securities (CMBS) was the top contributor to performance. CMBS benefited from solid spread tightening, with non-agency segments rallying alongside other credit markets and extending its recovery from the commercial real estate crisis of 2022–2023. Issuance was robust, up 30% year-over-year, and technical factors favored conduit sub-sectors. Subordinate tranches outperformed seniors, reflecting the risk-on environment. While CMBS lagged corporate credit sectors in terms of spread tightening, it remained a lead source of returns across securitized credit sectors. 

Asset backed securities (ABS) allocations, especially in non-benchmark sectors like solar ABS and whole business (franchise) ABS, were notable contributors. Longer spread duration profiles drove higher returns versus benchmark peers, and higher quality solar ABS rebounded following issuer bankruptcies in 2Q25. Subprime auto risk escalated, but stresses did not correlate with other consumer-oriented sub-sectors, which generally outperformed. 

Collateralized loan obligations (CLOs), where our positioning is almost exclusively in high-quality tranches (single A or above), contributed modestly. The sector wobbled in July but rallied through the remainder of the quarter, with robust new issuance and strong exchange traded fund (ETF) subscriptions. While headline metrics suggested solid loan market fundamental factors, isolated events such as the First Brands bankruptcy highlighted pockets of stress. 

Our allocation to RMBS, focused on prime jumbo and credit risk transfer (CRT), also contributed meaningfully. Prime jumbo subordinates led total returns within non-agency RMBS, supported by resilient homeowner credit profiles and solid income growth. Despite some pockets of stress—such as elevated delinquencies in Federal Housing Administration (FHA) loans—the overall fundamentals remained strong, with delinquency rates straddling historic lows.

With disruptive policy largely behind us, constructive elements of the Trump agenda are now encouraging risk-taking. Economic growth has exceeded expectations, buoyed in part by the ongoing artificial intelligence phenomenon, even as labor market softness continues to guide Fed policy. This unique blend—robust growth alongside a responsive Fed—has created a favorable backdrop for market participants, though compressed valuations pose a challenge. 

Within the non-agency RMBS sector, the “Jackson Hole pivot” has had lasting, positive implications. Lower mortgage rates and reduced volatility are supporting prepayments, making discount-priced non-agency RMBS one of the most attractive enduring risks in fixed income. Mortgage credit quality remains solid, and the potential for increased prepayments opens new avenues for outperformance. Reflecting these dynamics, our portfolio added to non-agency RMBS, focusing on low investment grade Prime Jumbo securities, to capitalize on these favorable trends. 

CMBS continues to offer some of the cheapest risk in securitized credit, especially as financial conditions ease and economic growth picks up. The market is still early in its recovery cycle, but recalibration to elevated new issue volumes has attracted larger allocations from insurers and money managers. Our portfolio responded by increasing exposure to CMBS, primarily through opportunities in the primary market, including Conduit and single-asset single-borrower (SASB) deals, and selectively adding office transactions. 

On the consumer side, the “resilience” narrative is showing signs of fatigue, with credit stress emerging more than consumption weakness. The “credit battleground” is now concentrated in sub-sectors exposed to low-income cohorts and those sensitive to policy changes. Within the portfolio, we reduced exposure to a few ABS bonds where we saw an opportunity to exit at favorable levels. 

Meanwhile, CLOs have rewarded senior tranche holders with income amid “higher for longer” rates, though subordinate debt and equity investors face increased credit risk. This dynamic is beginning to shift, and while the transition may be volatile, it is expected to present new opportunities for discerning investors. For now, our positioning remains up the stack, with the majority of our holdings rated single A or higher. 

In summary, we see a compelling environment for securitized credit investors, with multiple catalysts supporting continued growth and opportunity. Our strategic additions to non-agency RMBS and CMBS reflect our confidence in the resilience of homeowner and commercial real estate fundamentals, as well as the attractive risk-adjusted returns available in today’s market. As economic momentum builds and policy tailwinds persist, we believe our disciplined, forward-looking approach positions clients to benefit from both income and capital appreciation. We remain enthusiastic about the prospects for securitized credit and are committed to uncovering value and delivering strong results as the cycle advances.