Voya Short Duration High Income Fund Quarterly Commentary - 3Q26

High-yield 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/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 Fund underperformed the benchmark on a NAV basis. Industries contributing the most to performance were technology, media, as well as cable and satellite TV. Strength in technology was attributable to holdings in financial data services and cybersecurity. Within media, an issue from a market research company had the largest positive impact on the portfolio. Multiple issues from a satellite broadcaster drove performance within the cable and satellite TV industry. Industries detracting the most from performance were telecommunications, financial services, and air transportation. Weakness in telecommunications was broad, driven by issues from a digital infrastructure developer and a fiber internet provider. A number of holdings in the mortgage services space had a negative impact on performance within financial services. An issue from a low-cost airline was the primary source of detraction in air transportation.

The economic outlook remains favorable with strong nominal GDP driven by massive AI 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 fundamental factors, 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. 

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.