Voya Short Duration High Income Fund Quarterly Commentary - 1Q26

HY bonds declined in the first quarter of 2026. Escalating geopolitical tensions were the dominant macro-overhang with the Iran conflict disrupting global supply chains and driving energy prices higher. The fourth-quarter reporting season topped expectations and finished strong with year-over-year earnings growth nearing 14% for the S&P 500. Full-year earnings estimates continued to trend higher over period with management commentary highlighting resilient consumer spending contrasted by elevated capital expenditure forecasts. Overall, economic reports were positive with muted jobless claims activity, positive trends in key services and manufacturing surveys, and steady consumption balanced against mixed inflation readings and constrained housing dynamics. The U.S. Federal Reserve left interest rates unchanged with Jerome Powell stating a cut is unlikely without progress on inflation. Against this backdrop, rate cut expectations pushed out further and government debt yields rose with the 10-year U.S. Treasury yield settling at 4.32%. 

The ICE BofA US High Yield Index returned –0.55% for the quarter. BB, B, and CCC rated bonds returned -0.38%, -0.38%, and -2.21%, respectively. Spreads widened to 328bp from 281bp, the average bond price fell to 96.18, and the market’s yield rose to 7.65%. Industries were mixed for the period. Energy, telecoms, and chemicals outperformed whereas packaging/paper, financials, and real estate underperformed. Trailing 12-month default rates finished the period at 2.07% (par) and 1.87% (issues). The upgrade to downgrade ratio decreased to 0.9. Quarterly new issuance saw 91 issues priced, raising $79.8 billion in proceeds. Mutual fund flows were estimated at –$7.9 billion. 

For the quarter, the Fund underperformed the benchmark on a NAV basis. Industries contributing the most to performance were energy, cable and satellite TV, as well as utilities. Within energy, issuers in petroleum refining and energy infrastructure drove performance. Multiple issues from a satellite broadcaster that reported bottom-line upside positively impacted the portfolio in cable and satellite TV. Within utilities, an energy supplier and a retail propane distributor contributed in the period. Industries detracting the most from performance were financial services, air transportation, and support-services. Within financial services, multiple issues in mortgage services, as well as an issue in commercial financing, were sources of weakness. Detraction in air transportation was broad, with issues from commercial airlines, private charter operators, and aviation logistics companies all having an adverse effect. Performance in support-services was negatively impacted by issues in building products, power generation, and storage solutions.

The outlook for 2026 is largely unchanged, although conflict headwinds may offset some of the artificial intelligence proliferation, reindustrialization, and fiscal and monetary policy tailwinds. Fourth quarter results surpassed expectations, management guidance was constructive, earnings estimates continued to rise, and multiple economic datapoints indicated sustained growth. 

Going forward, corporate investment, consumer spending (helped by tax cuts/refunds), less regulation, energy & defense spending, and credit expansion could support gross domestic product (GDP) growth. On the other hand, a prolonged conflict lengthens the recovery period, pushing out eventual stability in commodity markets, supply chains, and geopolitics. The investment team continues to closely monitor the situation including the potential effects of higher energy prices on consumption, margins, sales, inflation, government debt yields, monetary policy, and capital expenditure plans. 

Bottom-up analysts continue to upwardly revise their 2026 (and 2027) earnings estimates due to steady growth, durable margins, productivity gains, expanding earnings breadth, AI spend, and cost controls. Expanding earnings breadth could lead to a further broadening out of market leadership. Earnings headwinds include risks cited above and rising operating expenses, among others, with the view that shifts in the use of free cash flow have trade-offs. 

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.