Voya Short Duration High Income Fund Quarterly Commentary - 4Q25

HY bonds advanced in the fourth quarter. Third-quarter earnings results beat expectations on strong artificial intelligence (AI) spending, though management commentary highlighted cost pressures and uneven demand trends. Economic data was mixed and visibility was impacted by the government shutdown; labor market indicators softened, while consumer spending and inflation metrics were stable. The U.S. Federal Rate cut rates by 25 basis points (bp) in both October and December, and signaled further accommodation with markets pricing additional cuts into 2026. Against this backdrop, the 10-year US Treasury yield finished modestly higher at 4.17% despite significant intra-quarter volatility.

The ICE BofA US High Yield Index returned 1.35% for the quarter, bringing full-year performance to 8.50%. BB, B, and CCC rated bonds returned 1.57%, 1.55%, and –0.52%, respectively. Spreads modestly widened to 281 bp from 280 bp, the average bond price fell to 98.06, and the market’s yield rose to 7.08%. Industries were mostly positive for the period. Gaming, metals, and healthcare outperformed whereas packaging and paper, chemicals, and cable underperformed. Trailing 12-month default rates finished the period at 1.88% (par) and 1.40% (issues). The upgrade and downgrade ratio increased to 1.3. Quarterly new issuance saw 75 issues priced, raising $65.4 billion in proceeds, bringing the full-year total to $332.0 billion. Mutual fund flows were estimated at $1.9 billion. 

For the quarter, the Fund underperformed the benchmark on a NAV basis. Industries contributing the most to performance were support-services, energy, and cable and satellite TV. Issues in power production and storage solutions were the main contributors in support-services. Strength in energy was broad with fuel distribution, energy supply, and petroleum refining exposures having the largest impact on performance. A satellite television provider contributed in cable and satellite TV. Retail, media, and technology were the only industries that detracted from performance in the period. A luxury department store issuer drove weakness in retail. Within media, an issue from a market research and analytics company had the largest negative impact on performance. A financial data software company detracted from performance in technology.

2026 U.S. economic growth could surpass that of 2025. Potential tailwinds include stimulus from the One Big Beautiful Bill Act (OBBBA) (tax cuts and refunds as well as capital spending acceleration), foreign direct investment from overseas, continued monetary policy easing (including the recently announced asset purchase program), and steady consumption. Reshoring activity, less regulation, expanding credit, and a rebound in consumer and business confidence are also potential drivers. Improvements in the housing or manufacturing sectors could aid growth as well. Key economic risks include heightened geopolitical tensions and elevated fiscal deficits globally. Additionally, if unemployment or inflation rise sharply, the odds of an economic slowdown increase. 

In an environment where changes in the labor market and prices are more muted, the Fed can continue to target a neutral policy position. Currently, market odds suggest additional interest rate cuts to a range of 3.00–3.25%—a level that is consistent with the Fed’s median, longer run projection of 3%. 

The U.S. HY market, yielding more than 7%¹, offers equity-like returns but with less volatility. The asset class is expected to deliver another year of coupon-like returns in 2026. The market’s attractive total return potential is a function of its discount to face value and higher coupon, which also serves to cushion downside volatility. Credit fundamental factors are stable, near-term refinancing obligations remain low, and management teams continue to exercise balance sheet discipline. Additionally, the market’s credit quality composition has improved. In this environment, new issuance is expected to remain steady, spreads can stay tight, and the default rate should continue to reside below the historical average. 

Longer-duration issues are the most likely to be impacted by high and volatile rates, but the overall HY market should have a dampened response due to its larger coupon relative to other fixed income alternatives. As a result, U.S. HY bonds contribute from both a diversification and a relative-performance perspective, offering a very compelling yield opportunity. 

The Short Duration High Income strategy remains an attractive fixed income solution without taking excess credit risk, the shorter maturity puts securities first in line to repayment at par, and the strategy lessens price volatility that may be highly amplified in passively managed strategies.