Voya High Yield SMA Quarterly Commentary - 3Q25
Total return approach, investing in below-investment grade corporate securities with a bias towards higher quality and a concentrated posture.
Market review
The third quarter of 2025 marked a turning point for the U.S. economy, as cracks in the labor market began to surface after several quarters of resilience. The June jobs report initially appeared strong, but a series of revisions later revealed a net decline during the month, and a much softer trend in subsequent months. This shift prompted the U.S. Federal Reserve to resume rate cuts at its September meeting, with projections indicating further easing through year end. Trade policy continued to shape inflation dynamics, with the pause on reciprocal tariffs coming to an end in July. Inflation data began to indicate the first signs of pass through to consumers, with core goods inflation rising month over month. Nonetheless, financial markets continued to reflect investor optimism. Rates rallied, led by the front end of the curve, and credit spreads tightened across sectors. As a result, most fixed income sectors delivered positive total and excess returns. In the high yield (HY) market, the option adjusted spread (OAS) of the Index tightened by 16 basis points (bp), finishing the quarter at 280 bp. By credit quality, the riskiest segment of the market outpaced higher-quality bonds during the quarter given the firmer backdrop.
Portfolio review
For the quarter, the SMA underperformed the Index on both a gross- and net-of-fees basis. The SMA’s focus on higher quality bonds detracted during the period.
Outlook
As we enter the final quarter of 2025, the economic landscape remains shaped by a complex interplay of policy shifts, labor market dynamics, and inflation pressures. Our base case anticipates U.S. growth to remain positive but below potential—likely hovering slightly above 1%—as consumers face the headwinds from newly implemented tariffs. However, we think companies may absorb some of the tariff cost, thanks to tailwinds from deregulation and fiscal stimulus via the One Big Beautiful Bill Act (OBBB Act), which delivers $300 billion in tax relief. While growth is expected to slow, the economy remains supported by easy financial conditions and targeted fiscal spending abroad, particularly on infrastructure and defense.
Inflation remains a focal point, with mixed signals emerging. Tariff passthrough to consumer prices has been more muted than anticipated, and data shows disinflationary trends in services. This is supportive of our view that tariffs function more like taxes—dampening demand rather than fueling price increases. However, risks persist. The potential for renewed wage pressures, driven by declining immigration and labor force participation, and delayed tariff effects could keep inflation anchored above 3%. The Fed, acknowledging the fragility of the labor market and limited inflation passthrough thus far, has resumed rate cuts and signaled a gradual, data dependent easing path. With fed funds still above neutral, policymakers retain flexibility to respond if conditions deteriorate more quickly than expected.
In fixed income markets, the corporate sector remains resilient, though consumer discretionary has shown vulnerability to tariff impacts. The 2Q25 earnings season continued to demonstrate resilience in fundamental factors for HY bond issuers. Most companies beat earnings, and guidance was strong with 1.6 times, as many companies issuing positive outlooks versus negative ones. Meanwhile, upgrade to downgrade ratio remained at healthy levels, while defaults continue to be benign despite a few idiosyncratic situations developing. On the technical factors side, investors continued to allocate to the asset class, with HY bond funds seeing net inflows during the period. Security selection remains key in the current environment, as dispersion is still elevated.
Key Takeaways
The Bank of America Merrill Lynch High Yield Master II Index (the Index) returned 2.40% for the quarter.
The SMA underperformed the Index on both a gross- and net-of-fees basis during the quarter, primarily due to its higher quality focus.
As we enter the final quarter of 2025, the economic landscape remains shaped by a complex interplay of policy shifts, labor market dynamics, and inflation pressures.