Voya Short Duration High Income Fund Quarterly Commentary - 2Q25
Capital preservation emphasis, investing in high-yield corporate debt while seeking to minimize credit, liquidity, and interest rate risks.
Portfolio review
HY bonds advanced on easing trade tensions, better-than-expected corporate earnings, and U.S. economic resiliency. The first quarter earnings season generally surpassed expectations with top- and bottom-line growth rates exceeding consensus estimates, although many companies pulled or reduced full-year guidance on trade uncertainty. Inflation measures subsided, employment data surpassed expectations, and real gross domestic product (GDP) growth was estimated to resume in the second quarter, while consumer confidence fell, and key manufacturing and services surveys showed contraction. The U.S. Federal Reserve kept interest rates steady and continued to project two cuts by year-end. Against this backdrop, the 10-year U.S. Treasury yield rose to 4.23% but closed well off the intra-quarter high of 4.63%.
The ICE BofA US High Yield Index returned 3.57% for the quarter, bringing year-to-date performance to 4.55%. BB, B and CCC rated bonds returned 3.46%, 3.47% and 4.28%, respectively. Spreads narrowed to 296 basis points (bp) from 355 bp, the average bond price rose to 97.12, and the market’s yield fell to 7.36%. Industries were broadly higher for the period. Healthcare, media and telecommunications outperformed whereas energy, retail and chemicals underperformed. Trailing 12-month default rates finished the period at 1.41% (par) and 1.03% (issues). The upgrade and downgrade ratio decreased to 0.6. Quarterly new issuance saw 87 issues priced, raising U.S. $77.3 billion in proceeds. Mutual fund flows were estimated at –$0.1 billion.
For the quarter, the Fund underperformed the benchmark on a NAV basis. Industries contributing the most to performance were financial services, automotive and support-services. Outperformance in financial services was broad-based, driven primarily by several issues in loan and mortgage services. Within automotive, an automotive repair chain that announced a strategic partnership was a source of strength. An issue in the building products industry gained as a perceived beneficiary of easing tariff concerns over the period. Energy, utilities and retail were the industries detracting the most from performance in the period. An issuer in energy specializing in liquefied natural gas infrastructure was the primary detractor. Within utilities, a residential solar provider drove underperformance. Weakness in retail stemmed from a luxury department store operator. >
Current strategy and outlook
Despite a strong recovery in risk assets, the macroeconomic outlook remains clouded given uncertainty around trade, monetary policy, government spending and geopolitics. On the other hand, economic data has been resilient, trade tensions while elevated have stabilized, earnings tailwinds have begun to emerge, Fed commentary has been less hawkish, capital market activity has been healthy, interest rates have fallen and energy prices have declined.
The U.S. economy should expand in 2025, even with tariffs potentially hampering growth. Trade policy clarity could begin to improve and as the range of outcomes narrow, uncertainty should lessen, and spending, investment, hiring and merger and acquisition activity can resume. Further out, fiscal stimulus, deregulation measures, capex tailwinds, productivity gains and a reindustrialization movement are potential growth drivers.
A resumption of monetary policy easing—currently, the market is pricing in two 25 bp interest rate cuts in 2025—would closer align the Fed with accommodation by central banks overseas. Early signs of labor market softening or minimal tariff price pass through could pull forward rate cuts, while steady employment or higher inflation could cause the Fed to move later.
As a result, the asset class continues to offer equity-like returns but with less volatility. 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. In this environment, new issuance is expected to remain steady, and the default rate should stay below the historical average of 3–4%.
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.
Key Takeaways
The high yield (HY) market remains well positioned to withstand an increasingly dynamic macro environment, with particular attractiveness exhibited by shorter-duration issues due to their inherently lower interest rate risk.
For the quarter, the Fund underperformed the benchmark on a net asset value (NAV) basis.
Looking ahead, asset class default expectations are projected to remain low due to several supporting factors including minimal refinancing risk in 2025.