Voya Short Duration High Income Fund Quarterly Commentary - 3Q25

HY bonds advanced driven by better-than-expected corporate earnings, further clarity on government policy, and continued economic momentum. Second quarter earnings reports generally exceeded expectations, with bottom-line growth beating consensus estimates by the widest margin in nearly four years despite many companies citing tariff pressures. The Trump administration announced a number of trade deals and signed the One Big Beautiful Bill Act (OBBBA) into law. Economic data was mixed; Institute for Supply Management (ISM) services and manufacturing surveys rebounded, multiple consumer spending metrics were better than expected, and third quarter gross domestic product (GDP) estimates moved higher. Conversely, inflation measures increased, employment data cooled, and consumer confidence contracted. The U.S. Federal Reserve cut interest rates by 25 basis points (bp) for the first time in 2025, with Fed commentary indicating a notable shift in stance and market expectations pricing two more cuts by year-end. Against this backdrop the 10-year U.S. Treasury yield fell to 4.15%, closing well off the intra-quarter high of 4.48%.

The ICE BofA US High Yield Index returned 2.40% for the quarter, bringing year-to-date performance to 7.06%. BB, B, and CCC rated bonds returned 2.17%, 2.43%, and 3.35%, respectively. Spreads narrowed to 280 bp from 296 bp, the average bond price rose to 98.08, and the market’s yield fell to 7.07%. Industries were mostly higher for the period. Media, metals, and retail outperformed whereas transportation, packaging/paper, and chemicals underperformed. Trailing 12-month default rates finished the period at 1.39% (par) and 1.15% (issues). The upgrade to downgrade ratio increased to 1.0. Quarterly new issuance saw 154 issues priced, raising $121.9 billion in proceeds, bringing the YTD total to $267.5 billion. Mutual fund flows were estimated at $5.0 billion. 

For the quarter, the Fund outperformed the benchmark on a NAV basis. Industries contributing the most to performance were financial services, support-services, and air transportation. Gains in financial services were broad-based, driven primarily by mortgage services exposure. Issues in building products, power production, and equipment leasing were the main contributors in support-services. Within air transportation, a low-cost airline and a private charter operator had the largest positive impact. Energy and retail were the only industries that detracted from performance in the period. An issuer specializing in liquefied natural gas infrastructure was the primary detractor in energy, and a luxury department store issuer drove weakness in retail.

The macro-outlook is improving following a stronger-than-expected economic rebound, an inflection in earnings estimates, a shift in the Fed’s stance, the OBBBA being signed into law, and increased visibility around trade policy. 

U.S. economic growth for the third quarter is tracking ahead of forecasts due to resilient consumption and strong corporate spending. Unemployment and inflation have increased but only modestly. Potential growth tailwinds include rising capex, reshoring, deregulation, and credit expansion whereas a sharp rise in either unemployment or inflation could increase the odds of an economic slowdown. 

The Fed is targeting a more neutral policy position with the market expecting two 25 bp interest rate cuts by year end followed by two cuts in 2026. However, Fed Chair Powell has noted that future rate decisions remain highly data dependent. The primary risk to the market’s current expected interest rate path is a Fed that must act aggressively to counterbalance either a sharp rise in unemployment or inflation. 

The U.S. HY market, yielding more than 7%1, offers equity-like returns but with less volatility. Currently, the asset class is on track to deliver a coupon-plus return in 2025. The market’s attractive total return potential is a function of its discount to face value and higher coupon, which also serves to cushion downside volatility. Credit fundamental factors are stable, near-term refinancing obligations remain low, and management teams continue to exercise balance sheet discipline. Additionally, the market’s credit quality composition continues to improve. In this environment, new issuance is expected to remain steady, spreads can stay tight, and the default rate should continue to reside below the historical average. 

Longer-duration issues are the most likely to be impacted by high and volatile rates, but the overall HY market should have a dampened response due to its larger coupon relative to other fixed income alternatives. As a result, U.S. HY bonds contribute from both a diversification and a relative-performance perspective, offering a very compelling yield opportunity. 

The Short Duration High Income strategy remains an attractive fixed income solution without taking excess credit risk, the shorter maturity puts securities first in line to repayment at par, and the strategy lessens price volatility that may be highly amplified in passively managed strategies.