Voya Intermediate Fixed Income SMA Quarterly Commentary - 4Q25

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 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.

For the quarter, the Voya Intermediate Fixed Income SMA underperformed its benchmark, the Bloomberg Intermediate Government/Credit Index (the Index) on both a gross- and net-of-fees basis. Other than a modest cash holding in the portfolio, which detracted during the period, given the solid performance of both Treasuries and investment grade corporate credit, there were no material performance drivers during the period. Duration and curve positioning did not materially impact relative returns, nor did security selection and sector allocation.

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)’s structure. 

In fixed income markets, elevated yields present compelling opportunities despite tight spreads. We continue to favor shorter spread duration, which offer attractive carry while limiting exposure to spread widening. Discounted non-agency residential mortgage-backed securities stand out as a high-conviction idea, poised to continue to outperform if housing rebounds as expected, and prepayment speeds pick up. Meanwhile, as inflation concerns continue to wane, duration should remain an effective hedge against risk assets, particularly at the front end which is more sensitive to Fed policy. 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.