Voya High Yield SMA Quarterly Commentary - 4Q25
Total return approach, investing in below-investment grade corporate securities with a bias towards higher quality and a concentrated posture.
Market review
The final quarter of 2025 opened under the shadow of the government shutdown, which had implications for both financial markets and the broader economy. With key agencies shuttered, official data on labor markets and inflation was delayed, leaving policymakers and investors to rely on secondary indicators. While the shutdown’s direct economic impact was modest, it weighed on sentiment and marginally dampened activity. Credit markets faced additional turbulence, driven by high-profile bankruptcies and aggressive capital spending trends. Corporate credit spreads widened sharply from historically tight levels before retracing as supply pressures eased. While spreads finished roughly unchanged, the episode sparked debate over whether exuberance in artificial intelligence (AI)-related spending could signal the beginnings of a bubble, a theme that will likely persist into 2026. Against this backdrop, fixed-income markets delivered mixed but generally positive performance. Front-end rates declined in response to Fed easing, while longer maturities held steady, reflecting persistent growth and inflation expectations. Credit sectors delivered modest excess returns, with higher-yielding securitized products outperforming corporates.
Portfolio review
For the quarter, the SMA outperformed the Index on a gross-of-fees but underperformed on a net-of-fees basis. Gross of fees, the SMA’s higher quality focus was a key contributor to relative performance during the period, as riskier segments of the high yield (HY) bond market underperformed. In general, below-investment corporate credit markets reflected a clear risk-off tone this quarter, driven by negative headlines related to a few high-profile bankruptcies that increased scrutiny of lending standards.
Outlook
As we look ahead to 2026, our outlook is relatively constructive, even as spreads remain tight. We expect growth to push above trend, supported by easier financial conditions that should unlock a long-awaited housing recovery after years of stagnation. While labor market softness and lingering tariff effects remain notable headwinds, these will likely be offset by pro-business policies, including tax cuts and deregulation. Importantly, we believe this growth will not reignite inflation. The last inflation surge was driven primarily by fiscal stimulus, and a repeat of that dynamic appears unlikely. Additionally, corporations face diminished pricing power as wage growth has cooled and consumers, burdened by cumulative price increases, are much more cost sensitive.
Labor market dynamics will remain a key theme. Job growth should stay muted in the near term, reflecting cyclical weakness and elevated policy uncertainty. However, structural constraints—lower immigration and declining labor force participation—will limit downside pressure on wages, even as unemployment remains elevated. This points to a period of “jobless growth,” where output expands without a hiring boom.
AI will continue to dominate the narrative. Companies are investing heavily in AI capabilities and infrastructure, driving significant issuance in debt markets. While AI promises long-term productivity gains—potentially lifting annual growth by up to 1.5 percentage points—the slow realization of these benefits will periodically challenge valuations. We do not see an AI bubble today, but the scale of capital formation and the uncertainty around returns underscore the importance of disciplined security selection and underwriting.
Central banks remain pivotal. Among developed markets, the U.S. Federal Reserve stands out as one of the only central banks likely to continue cutting rates. Despite inflation remaining above target, the Fed views its current policy rate as above neutral and aims to prevent further labor market weakness. That said, we expect the Fed to continue to tread carefully. While Fed Chair Jerome Powell’s term ends in May and his successor will likely align more closely with the administration, meaningful influence will be constrained by the Federal Open Market Committee (FOMC) structure.
In fixed income markets, elevated yields present compelling opportunities despite tight spreads. HY balance sheets remain in good shape, with leverage and coverage levels tracking above historic norms, reflective of the higher quality mix of the HY bond market versus historical averages. Overall, 3Q25 earnings season was positive, but sector-level dispersion was elevated. Technicals were positive, driven by continued supply shortage as new-issue activity has underwhelmed. While spreads enter the year at tight levels, they are supported by low default rates, favorable earnings trends, and above-average historical credit profiles. Overall, we continue to view the current environment as the “golden age of income”—one where disciplined positioning and security selection can deliver strong risk-adjusted returns.
Key Takeaways
The fourth quarter of 2025 was defined by policy uncertainty stemming from the government shutdown, with additional turbulence sparked bankruptcies and a surge in artificial intelligence (AI)-driven investment.
The SMA outperformed the Index during the quarter on a gross-of-fees but underperformed on a net-of-fees basis, 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.