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Voya High Yield SMA Quarterly Commentary - 3Q25

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.

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.

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Returns are benchmarked to the ICE Bank of America U.S. High Yield Master II Constrained Index, which does not incur management fees, transaction costs, or other expenses associated with a composite portfolio. The ICE Bank of America High Yield Master II Index is a market value - weighted index consisting of U.S. doll ar - denominated, non - investment grade bonds not currently in default and limits any individual issuer to a maximum of 2% benchmark exposure. Securities prices used to value the benchmark index f or the purposes of calculating total return may or may not differ significantly from those used to value securities held within composite portfolios. Index returns do not reflect fees, broker age commissions, taxes or other expenses of investing. Investors cannot invest directly in an index.

All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. High-Yield Securities, or “junk bonds”, are rated lower than investment-grade bonds because there is a greater possibility that the issuer may be unable to make interest and principal payments on those securities. The strategy may use Derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses and have a potentially large impact on performance. Foreign Investing does pose special risks including currency fluctuation, economic and political risks not found in investments that are solely domestic. Risks of foreign investing are generally intensified in Emerging Markets. As Interest Rates rise, bond prices may fall, reducing the value of the share price. Debt Securities with longer durations tend to be more sensitive to interest rate changes. Other risks of the Fund include but are not limited to: Credit Risks; Other Investment Companies’ Risks; Price Volatility Risks; Inability to Sell Securities Risks; and Securities Lending Risks. This information is proprietary and cannot be reproduced or distributed.

Companies’ Risks; Price Volatility Risks; Inability to Sell Securities Risks; and Securities Lending Risks. This information is proprietary and cannot be reproduced or distributed. Certain information may be received from sources Voya Investment Management (“Voya IM”) considers reliable; Voya IM does not represent that such information is accurate or complete. Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial data.

Actual results, performance or events may differ materially from those in such statements. Any opinions, projections, forecasts and forward-looking statements presented herein are valid only as of the date of this document and are subject to change. Nothing contained herein should be construed as (i) an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Voya IM assumes no obligation to update any forward-looking information. 

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. 

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. 

BofA Merrill Lynch® indices used with permission, are provided “AS IS”, without warranties, and with no liability. BofAML does not sponsor, endorse, review, or recommend Voya or its products or services. 

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. 

Past performance does not guarantee future results.

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