Voya High Yield Bond Fund Quarterly Commentary - 3Q25
Total return approach, investing in below investment grade corporate securities.
Portfolio review
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 OBBBA into law. Economic data was mixed; Insitute of 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 Fed cut interest rates by 25 basis point (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 as well as paper, and chemicals underperformed. Trailing 12-month default rates finished the period at 1.39% (par) and 1.15% (issues). The upgrade and 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 Class I shares of the Fund underperformed the benchmark on a NAV basis. The Fund’s underweight in CCC rated bonds, which outperformed BB and B rated bonds, was a relative performance headwind. Industries helping relative performance in the period included chemicals, steel producers and products, and recreation & travel. Both security selection and an industry underweight were sources of strength in chemicals, primarily through positioning in a specialty chemicals issue that outperformed and a lack of exposure to several significant underperformers. Overweight exposure to several outperforming issues from a steel producer drove performance in the steel producers and products industry. Within recreation & travel, relative strength was attributable to positioning in issues from multiple cruise lines, offsetting a minor negative impact from an industry overweight. Industries detracting the most from relative performance in the period were media content, telecommunications, and support-services. The primary source of weakness in media content was a lack of exposure to several issues in film and television and radio entertainment that performed well. In telecommunications, an industry underweight was the largest performance headwind, with additional weakness stemming from general security selection. Security selection also weighed on performance in support-services, primarily due to overweight positioning in issues within storage and equipment rental.
Current strategy and outlook
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 yearend followed by two cuts in 2026. However, 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.
Key Takeaways
High-yield (HY) bonds advanced driven by better-than-expected corporate earnings, further clarity on government policy, and continued economic momentum.
For the quarter, the Class I shares of the Fund underperformed the benchmark on a net asset value (NAV) basis.
The macro-outlook is improving following a stronger-than-expected economic rebound, an inflection in earnings estimates, a shift in the U.S. Federal Reserve’s stance, the One Big Beautiful Bill Act (OBBBA) being signed into law, and increased visibility around trade policy.