Voya Securitized Credit Fund Quarterly Commentary - 3Q26

The third quarter extended the economic resilience seen earlier in the year, but financial conditions became notably less supportive. Consumer spending remained firm despite higher energy prices and borrowing costs, while corporate investment, particularly artificial intelligence-related infrastructure spending, continued to support growth and equity markets. Re-escalating tensions with Iran added to inflation concerns, while elevated fiscal deficits and heavy Treasury issuance placed further pressure on bond markets. These forces culminated in a sharp September selloff: the 2-year and 10-year Treasury yields rose 71 and 82 basis points, respectively, and the MOVE Index increased more than 50%. The U.S. Federal Reserve delivered another rate increase as persistent inflation and a firm labor market provided both the motivation and flexibility to maintain a restrictive stance. 

The combination of resilient growth and rising financing costs created a more nuanced environment for securitized credit. Credit fundamental factors generally remained supportive, markets remained open, and investor demand was sufficient to absorb substantial issuance. At the same time, the rate shock produced significant dispersion between shorter-duration or floating-rate assets and longer-duration securities. Agency RMBS bore the most direct impact because of its longer duration and negative convexity. By contrast, asset-backed securities (ABS) benefited from shorter duration, relatively predictable cash flows, and structural protections. Benchmark ABS generated a positive excess return despite more than $100 billion of third-quarter supply, while non-benchmark ABS produced a broader but generally positive range of excess returns. Consumer fundamental factors remained uneven: prime borrowers continued to benefit from strong balance sheets, while lower-income consumers experienced greater affordability pressure. 

Performance within housing and commercial real estate (CRE) credit was similarly differentiated. Non-agency RMBS fundamental factors remained broadly sound, supported by resilient homeowner credit profiles, solid income growth, and approximately $18 trillion of homeowner equity. Overall mortgage delinquencies remained below their long-run average, although Federal Housing Administration (FHA) and non-qualified mortgage (QM) delinquencies were elevated amid affordability pressures. Within CMBS, delinquencies remained elevated, although new distressed situations remained limited as property level dynamics have remained favorable into meaningful economic growth. While the official delinquency rate rose quarter over quarter, this is primarily the result of several large loans failing to repay at maturity. Collateralized loan obligations (CLO) benefited from their floating-rate characteristics and delivered strong total returns. Although spreads entered the quarter near historically tight levels, demand from insurers, ETFs, and money managers remained supportive, while software and technology borrowers faced greater scrutiny as markets more carefully assessed AI-related disruption risk. 

Against this backdrop, the Fund outperformed its securitized benchmark, with positive contributions from all four sectors. CMBS was the largest contributor, led by single-asset single-borrower (SASB) deals, which was supported by demand for floating rate assets. Non-agency RMBS was the second-largest contributor, driven primarily by prime jumbo holdings, as resilient homeowner fundamental factors and strong collateral performance continued to support residential credit markets. ABS and CLO exposures also contributed, albeit to a lesser extent, benefiting from attractive carry, strong structural protections, and limited sensitivity to the sharp rise in interest rates. Duration detracted from absolute performance as Treasury yields moved materially higher during the quarter, but the portfolio's shorter duration profile relative to the benchmark contributed to relative results. Collectively, these results reinforced the value of emphasizing higher-spread securitized sectors, strong collateral fundamental factors, and disciplined duration management during a period when economic resilience remained supportive but financing conditions became increasingly restrictive.

As we enter the final quarter of 2026, markets are grappling with a question that has increasingly defined the investment landscape: can the economy continue to absorb materially higher interest rates without a meaningful deterioration in growth or credit fundamental factors? The third quarter reaffirmed the economy's resilience, supported by resilient consumer spending, solid labor markets, and ongoing investment in AI-related infrastructure. At the same time, the sharp rise in Treasury yields, persistent inflation concerns, elevated government borrowing needs, and geopolitical uncertainty have repriced risk across fixed income markets. While the historic rate move has largely addressed concerns around compressed valuations, the risks underlying that repricing remain very much in focus. Looking ahead, the cost of sustained higher rates and the economy's ability to adjust to them will likely be the most important determinant of market performance through year-end and into 2027. 

Within securitized credit, we continue to see an environment characterized more by security selection than broad asset allocation. Residential mortgage credit remains attractive, supported by generally strong homeowner balance sheets, solid employment conditions, substantial accumulated home equity, and delinquency rates that remain below long-term averages despite pockets of stress in lower-quality segments. With current valuations already pricing in rock-bottom prepayment speeds, further downside appears limited, while recent legislative and regulatory changes that improve mortgage-market efficiency—an eventual pickup in prepayments—could provide meaningful upside. Reflecting this view, RMBS remains our largest allocation at 38% of the portfolio, with Prime Jumbo RMBS continuing to represent our largest subsector exposure. 

CRE remains one of the more complex areas of the market. Strong economic activity has helped contain the emergence of new credit problems, but higher financing costs continue to pressure refinancing activity and property valuations. We expect CRE performance to become increasingly transaction-specific, creating a wider gap between strong and weak assets. While CMBS remains, in our view, among the most attractively valued sectors within securitized credit, security selection has become increasingly important as elevated cap rates and financing costs challenge weaker properties and issuers. CMBS remains a significant allocation at 34% of the portfolio, reflecting our continued conviction that carefully selected CRE credit offers attractive risk-adjusted return potential despite near-term uncertainties. 

Elsewhere, consumer credit fundamental factors remain broadly stable, supported by healthy labor markets and resilient higher-income consumers. Elevated yields, limited duration risk, and strong structural protections continue to underpin our positive outlook for ABS. In CLOs, demand for floating-rate assets should remain supportive; however, spreads are extremely tight and, in our view, do not adequately compensate investors for credit risk as a significant maturity wall approaches. Accordingly, we remain defensively positioned, with our CLO allocation focused almost exclusively on higher-quality tranches. Overall, we continue to maintain a balanced portfolio positioned to benefit from resilient economic growth but capable of navigating a market environment where higher rates are likely to remain a defining feature.