Focus on Short-Duration, U.S. Non-Investment Grade Credit

Voya Short Duration High Income Fund Quarterly Commentary - 2Q25

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.

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. 

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1Source: ICE Data Services; data as of June 2025

 

The ICE BofA 1-3 Year US Treasury Index is an unmanaged index that tracks the performance of the direct sovereign debt of the U.S. Government having a maturity of at least one year and less than three years. Investors cannot directly invest in an Index. 

Past performance is no guarantee of future returns. All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. All security transactions involve substantial risk of loss. Please reference your client statement for a complete review of recent transactions and performance. 

Investment Risks: All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. Debt Instruments: Debt instruments are subject to greater levels of credit and liquidity risk, may be speculative and may decline in value due to changes in interest rates or an issuer’s or counterparty’s deterioration or default. High Yield Fixed Income Securities: There is a greater risk of issuer default, less liquidity, and increased price volatility related to high yield securities than investment grade securities. Market Volatility: The value of the securities in the Fund may go up or down in response to the prospects of individual companies and/or general economic conditions. Price changes may be short- or long-term. Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issue, recessions, or other events could have a significant impact on the Fund and its investments, including hampering the ability of the portfolio’s manager(s) to invest the Fund’s assets as intended. Issuer Risk: The Fund will be affected by factors specific to the issuers of securities and other instruments in which the Fund invests, including actual or perceived changes in the financial condition or business prospects of such issuers. Interest Rate: The values of debt instruments may rise or fall in response to changes in interest rates, and this risk may be enhanced for securities with longer maturities. Credit Risk: If the issuer of a debt instrument fails to pay interest or principal in a timely manner, or negative perceptions exist in the market of the issuer’s ability to make such payments, the price of the security may decline. Investors should consult the Fund’s Prospectus and Statement of Additional Information for a more detailed discussion of the Fund’s risks. 

This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Strategy holdings are fluid and are subject to daily change based on market conditions and other factors. 

Maturity allocations are based on the sum of the weighted average of each security where maturity is relevant. Credit Quality is calculated based on S&P ratings. If no S&P rating is available, the Moody’s equivalent will be used. If no Moody’s rating is available, the security will be placed in the NR (Not Rated) category. Internal ratings will not be used for any security. Ratings do not apply to the Fund itself or the Fund shares. Ratings are subject to change. Ratings are a measure of quality and safety of a bond based on the financial condition of the issuer. Generally accepted, AAA is the highest grade (best) to D which is the lowest (worst). Due to rounding, numbers presented may not add up to 100% and percentages may not precisely reflect the absolute figures. 

The Fund discussed may be available to you as part of your employer sponsored retirement plan. There may be additional plan level fees resulting in personal performance that varies from stated performance. Please call your benefits office for more information.

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