Comprehensive Research, Broad Diversification

Voya High Yield Bond Fund Quarterly Commentary - 2Q24

Key Takeaways

Despite intra-quarter volatility, risk assets largely produced positive returns led by equity markets while bond markets were flattish in the second quarter. 

For the quarter, the Strategy outperformed the Index on a net asset value (NAV) basis.

The macro outlook remains supportive despite the expected slowdown in economic growth, as expectations of U.S. Federal Reserve cuts later in the year have increased amid cooling inflation and signs of softening in labor markets.

Total return approach, investing in below investment grade corporate securities.

Portfolio Review

Despite intra-quarter volatility, risk assets largely produced positive returns, led by equity markets, while bond markets were flattish in the second quarter. Volatility early in the quarter was driven by continued solid economic growth data in the United States, resilience in labor markets, and an uneven decline in inflation data. This led to a bouncing around of both interest rates as well as expectations of potential Fed cuts later in the year. Heading into June, economic and payroll data began showing signs of weakness, while the May Consumer Price Index (CPI) report surprised to the downside, which resulted in a decline in yields from their peak. By the end of the quarter, the yield on the U.S. 10-Year Treasury closed 20 basis points (bp) higher overall at 4.40% but off its peaks seen earlier in the period. 

High yield (HY) spreads finished the quarter modestly wider at 309 bp on an optionadjusted spread (OAS) basis. The Bloomberg High Yield 2% Issuer Cap Index (Index) posted a positive total return for the quarter of 1.09%, bringing its year-to-date return to 2.58%. From a quality perspective, higher-rated bonds outperformed, as BB, B and CCC rated bonds returned 1.32%, 1.03%, and –0.01%, respectively, though the CCC rated bonds underperformance was more attributable to credit-specific negatives than to a broad aversion to risk. Primary market issuance remained active, as total supply has crossed the U.S. $160 billion mark YTD. Use of proceeds continues to primarily consist of refinancings, while mergers and acquisitions and leveraged buyout deals remain subdued due to high financing costs. Investor flows into HY were broadly positive during the quarter, driven by attractive all-in yields and strong equity market performance. 

For the quarter, the Strategy outperformed the Index on a NAV basis. Security selection within the CCC rating cohort was the primary contributor to relative performance during the quarter. This mostly reflected the Strategy’s avoidance of many of the negative idiosyncratic outcomes referenced above, such as Lumen, iHeart, Uniti Communications and Hertz. The largest negative in the period came from the Strategy’s position in television broadcaster EW Scripps, as concern about rapidly changing dynamics in the media space weighed on bond prices.

Current Strategy and Outlook

The macro outlook remains supportive despite the expected slowdown in economic growth, as expectations of Fed cuts later in the year have increased amid cooling inflation and signs of softening in labor markets. Fundamental factors in the HY market remain generally healthy, barring a few pockets of stress in the more secularly challenged sectors. We believe the main risks include a more meaningful slowdown in growth and the possibility of margin compression, as pricing power diminishes against the backdrop of disinflation. The prevailing supply and demand imbalance should continue to persist, with net issuance remaining muted, while fund flows and coupon reinvestment support demand. Although spreads do not appear particularly cheap, solid credit fundamental factors should limit spread widening and the carry from high all-in yields should cushion total returns. 

We maintain an overweight to single-B rated bonds, while being modestly underweight in BB and CCC rated bonds, and we continue to focus on name-specific risk, which we expect to drive performance as dispersion remains elevated. In sector positioning, we remain positive on the healthcare space given higher utilization rates and easing labor costs, and the energy sector, which continues to benefit from firm commodity prices. In addition, we have become more constructive recently on the chemicals sector, as we believe the economic weakness in Europe and China has bottomed. Meanwhile, we continue to maintain a cautious stance in industries that face secular challenges, such as media and cable.

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The Bloomberg Barclays High Yield Bond—2% Issuer Constrained Composite Index is an unmanaged index that includes all fixed income securities having a maximum quality rating of Ba1, a minimum amount outstanding of $150 million, and at least one year to maturity. Investors cannot invest directly in an index.

Principal Risks: All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield. Investments rated below investment-grade (or of similar quality if unrated) are known as High-Yield Securities or “junk bonds.” High-yield securities are subject to greater levels of credit and liquidity risks. High-yield securities are considered primarily speculative with respect to the issuer’s continuing ability to make principal and interest payments. Call Risk During periods of falling interest rates, a bond issuer may call or repay its high-yielding bonds before their maturity date. If forced to invest the unanticipated proceeds at lower interest rates, the Fund would experience a decline in income. Prices of bonds and other debt securities can fall if the issuer’s actual or perceived Credit Risk deteriorates, whether because of broad economic or company-specific reasons. In severe cases, the issuer could be late in paying interest or principal or could fail to pay altogether. Derivative Instruments are subject to a number of risks, including the risk of changes in the market price of the underlying securities, credit risk with respect to the counterparty, risk of loss due to changes in interest rates and liquidity risk. The use of certain derivatives may also have a leveraging effect, which may increase the volatility of the Fund and reduce its returns. Other risks of the Fund include but are not limited to: Liquidity Risk, Credit Derivatives Risk, Securities Lending Risk, Interest Rate Risk and U.S. Government Securities and Obligations Risks. Investors should consult the Fund’s prospectus and statement of additional information for a more detailed discussion of the Fund’s risks. An investment in the Fund is not a bank deposit and is not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.

This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities.

Past performance is no guarantee of future results.

The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Portfolio holdings are fluid and are subject to daily change based on market conditions and other factors.

The Fund discussed may be available to you as part of your employer sponsored retirement plan. There may be additional plan level fees resulting in personal performance to vary from stated performance. Please call your benefits office for more information.

AAA is the highest grade (best) to D which is the lowest (worst) is calculated based on S&P, Moody’s, and Fitch agency ratings. If the ratings from all 3 rating agencies are available, securities will be assigned the Median rating. If the ratings are available from only two of the agencies, the more conservative of the ratings will be assigned to the security. If the rating is available from only one agency, then that rating will be used. Any security that is not rated is placed in the NR (Not Rated) category. Ratings do not apply to the Fund itself or to the Fund shares. Ratings are subject to change.

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