Voya Securitized Credit Fund Quarterly Commentary - 1Q26

The first quarter of 2026 was shaped by the intersection of accelerating AI-driven disruption and a sharp escalation in geopolitical risk, both of which contributed to higher volatility and a repricing of risk across global financial markets. Early in the quarter, investor concerns centered on the rapid adoption of agentic AI tools and their potential to disrupt incumbent software and services business models. These concerns weighed on leveraged credit sectors tied to technology exposure and contributed to broader risk aversion as questions emerged around the durability of cash flows supporting leveraged balance sheets. 

At the same time, elevated AI-related capital spending drove heavy issuance in investment-grade (IG) corporate credit, pressuring valuations despite still-constructive macro data. As the quarter progressed, geopolitical developments became the dominant driver of market sentiment. The expansion of military conflict involving the U.S., Israel, and Iran introduced significant energy supply risk, particularly as disruptions in the Strait of Hormuz drove oil prices higher and reignited inflation concerns. While markets initially assumed the conflict would be contained, risk assets sold off more meaningfully as expectations shifted toward a more prolonged disruption.

Macroeconomic data added to uncertainty. Labor market readings were choppy, reinforcing debate around late-cycle dynamics, while inflation pressures moderated unevenly. By quarter-end, interest rates finished higher, led by the front end of the curve as expectations for rate cuts were pushed out, resulting in a material flattening. Credit spreads ended the quarter wider, though markets remained orderly and liquid throughout the drawdown. 

Within securitized markets, performance dispersion was pronounced. Agency RMBS was the strongest performing sector within the Aggregate Index, benefiting early in the quarter from falling rate volatility and renewed demand from the GSEs following the announcement of a large purchase program. As volatility increased later in the quarter, agency RMBS became more correlated with broader risk markets, though still finished with positive excess returns. Asset backed securities (ABS) posted modestly positive performance, supported by stable spreads and issuer discipline, while non-benchmark ABS experienced wide dispersion. Lower-quality solar ABS came under pressure as credit performance deteriorated, while whole-business and select consumer ABS performed well earlier in the quarter. CMBS generated modestly positive excess returns, aided by controlled issuance and stable senior bond demand, while fundamental concerns remained largely sector-specific and well-telegraphed. Collateralized loan obligations (CLO) delivered strong total returns, benefiting from floating-rate exposure, though spreads widened and excess returns were negative as loan markets reacted to AI -related disruption fears concentrated in software and IT collateral.

Against this backdrop, the Strategy outperformed its securitized benchmark during the quarter, despite meaningful headwinds. The most significant detractor versus the benchmark was the strategy’s lack of exposure to agency MBS, which was the best-performing sector in the Aggregate Index. Agency MBS benefited directly from declining rate volatility early in the quarter and incremental demand from the GSEs. However, the strategy more than offset this headwind through allocations to off-benchmark CMBS and non-agency RMBS positions. 

RMBS was the largest contributor to performance, driven primarily by exposure to prime jumbo collateral. These assets benefited from resilient household balance sheets, ample homeowner equity, and continued stabilization in housing fundamental factors despite higher mortgage rates. CMBS also contributed, with performance driven largely by positions in conduit and SASB. These exposures benefited from stable cash flows, attractive structural protections, and limited new supply, while remaining insulated from the more pronounced valuation pressures seen in corporate sectors. ABS detracted modestly from performance, reflecting exposure to off-benchmark sectors such as solar ABS. While fundamentals remain bifurcated across consumer credit, select segments experienced spread volatility during periods of heightened risk aversion. CLOs also detracted slightly, despite the strategy’s focus on high -quality tranches (single-A and above), as spread widening in leveraged loans weighed on valuations even as underlying credit metrics remained stable. Finally, duration detracted from returns as front-end interest rates rose in response to energy-related inflation pressures and reduced expectations for near-term rate cuts. Overall, performance during the quarter reflected the strategy’s emphasis on higher -quality securitized credit and valuation discipline in an increasingly volatile and late-cycle market environment.

The outlook for financial markets entering the second quarter of 2026 reflects a complex but improving balance between elevated geopolitical risk and an economic backdrop that remains more resilient than widely feared. The Iran conflict underscored how quickly disruptive agenda risks can reprice markets, particularly through energy channels, yet risk assets demonstrated an ability to stabilize once uncertainty became better framed. Despite energy-related headwinds, economic momentum continues to be supported by a resilient consumer, easing financial conditions at the margin, and ongoing productivity gains linked to AI. Against this backdrop, markets appear positioned for growth to surprise modestly to the upside, even as inflation remains uneven and policy rates are expected to come down more gradually than previously anticipated. Importantly for credit markets, valuations have decompressed across several sectors, creating a more attractive starting point for risk-taking as volatility subsides.

Within securitized credit, housing dynamics are re-emerging as a central theme. Policy actions, executive measures, and potential reductions in bank risk-based capital requirements are expected to lower effective mortgage costs, supporting a pickup in housing activity after an extended slowdown. While delinquency pockets persist—most notably in FHA and non-QM mortgages—loss severities remain contained, and broader homeowner balance sheets continue to benefit from meaningful embedded equity. These conditions are constructive for RMBS, particularly higher-quality segments. Consistent with this view, RMBS remains our largest allocation at 36% of the portfolio, with prime jumbo RMBS representing the largest subsector exposure at 20%. This high-quality, prepayment-sensitive collateral profile is well positioned to benefit should refinancing and turnover activity gradually improve as financing conditions ease. 

Commercial real estate remains in a recovery phase, with headline losses likely as impaired office and retail assets continue to clear. However, this clearing process is essential for restoring long-term health to the sector. CMBS valuations remain among the most compelling within securitized credit, particularly if financial conditions ease in a pro-cyclical manner alongside steady economic growth. Markets have begun to absorb higher issuance volumes, enabling increased participation from insurers and traditional asset managers. With CMBS comprising roughly 34% of the portfolio, we remain focused on collateral performance and structural protections, while remaining selective given ongoing property-type dispersion. 

Consumer credit conditions have stabilized following the stress experienced in the second half of 2025. The exit of weaker issuers has improved overall market quality, supporting robust issuance and liquidity in ABS. Our ABS allocation stands at approximately 12%, with exposure concentrated in off - benchmark selections where we see compelling structural protections and asset-level cash flow visibility. 

CLOs remain our smallest allocation at roughly 12% and are biased toward high-quality tranches, predominantly single-A and above. That said, spread widening during the quarter created selective opportunities to add BB exposure opportunistically. 

Overall, we believe the securitized markets remain well positioned for a period of improving risk-adjusted returns, supported by valuation reset, sector-specific fundamentals, and an increasingly differentiated opportunity set.