Voya GNMA Income Fund Quarterly Commentary - 3Q26

• The U.S. Federal Reserve announced a 25 basis points (bp) hike in September, in response to higher inflation fears and surging energy prices, marking a shift toward renewed tightening after the prior holding cycle. The September dot plot showed a median year-end 2026 projection at 4.125%, implying a hawkish stance with another 25 bp hike from the current rate as the central tendency. Fed’s for mortgage-backed securities (MBS) holdings declined by roughly $50 billion during the quarter. 
• Interest rates steepened with 2-year rate up 71 bp and 30-year rate up 82 bp during the quarter. The 30-year fixed mortgage rate increased roughly 85 bp to 7.28%. 
• GNMA MBS underperformed Treasury hedges by 118 bp, as the September rates selloff and elevated rate volatility weighed on performance. Lower coupons outperformed higher coupons with 2s holding up the best among the stack at negative 95 bp of excess return. 
• Housing market activity remained challenged. Existing home sales softened seasonally, while new home sales and construction activity remained subdued. Deteriorating affordability, the lock-in effect, and macroeconomic uncertainty continued to constrain turnover. 
• Voya GNMA Income Fund outperformed the GNMA benchmark on a net asset value (NAV) basis.

Voya GNMA Income Fund outperformed the benchmark on a NAV basis for the quarter. During the quarter, outperformance was mostly attributable to collateralized mortgage obligations (CMOs). Modest duration overweight detracted from performance.

Agency mortgage-backed securities (MBS) were not immune to the broader selloff in the third quarter, pressured by a sharp rise in Treasury yields and heightened rate volatility. The 10-year Treasury rate rose 82 bp during the quarter to 5.287%, and 2yr/10yr steepened by 11 bp. Housing activities remained challenged in rate hike environment and seasonal cooling. Inflation, as measured by Consumer Price Index (CPI), remained elevated and in-line with the median market expectations, reflecting Fed’s stronger consensus for future increases. 

From a technical perspective, the material increase in Treasury yields and rate volatility in September drove meaningful spread widening and weighed on MBS relative performance late in the quarter. The rates selloff increased duration and hedging pressure across the mortgage basis, while demand from government-sponsored enterprises (GSEs), banks, and foreign investors remained subdued. Constrained mortgage supply provided a partial offset to the broader risk-off technical backdrop. On the policy front, the GSE’s adoption of VantageScore4.0, alongside merging the LLPA grid with FICO, could create greater rate incentives for borrowers and lead to a heightened prepay response from borrowers if and when rates rally. 

From a fundamental perspective, the rise in mortgage rates during the quarter further entrenched the lock-in effect and weighed on both turnover and refinance activity. The 30-year mortgage rate rose 85 bp to 7.28%, virtually eliminating any refinancing incentive and keeping prepayment speeds subdued. Affordability remained a hurdle for prospective buyers and continued to limit housing turnover. 

Housing price appreciation re-accelerated during the quarter, with Case-Shiller 20-City Home Price Index rising 0.32% on a seasonally adjusted basis in July. Overall MBS supply remained docile for both gross and net issuance, as elevated mortgage rates continued to weigh on housing demand. The Fed’s balance sheet runoff remained a concern for investors, although constrained organic supply provided a counterbalance to Fed runoff. Against the backdrop of wider spreads, valuations provide an attractive carry profile, however, near-term performance will be determined by demand technical factors. Ginnie’s continued to account for the majority of net supply among issuers; however, the GNMA fund managers will continue to monitor the technical factors impacting MBS supply. 

Voya GNMA Income Fund continues to be underweight GNMA collateral relative to the benchmark where performance is determined by technical demand factors. The Fund remains overweight off-benchmark GNMA and Agency-backed collateralized mortgage obligations (CMOs) which offer greater longer-term value with higher spreads relative to generic collateral, especially on an option-adjusted basis. Additionally, the Fund maintains a preference for production and higher coupon collateral such as 5s through 6s.