Voya Short Duration High Income Fund Quarterly Commentary - 2Q26

HY bonds advanced in the second quarter as geopolitical tensions eased, helping stabilize energy prices and temper macro uncertainty. Corporate results during the period were strong, with the S&P 500 delivering its highest earnings growth and surprise rates since 2021, supported by robust capex and strong hyperscaler demand. On the economic front, employment was steady and the manufacturing sector expanded alongside the services sector, while inflation accelerated and consumer confidence remained subdued. The U.S. Federal Reserve left interest rates unchanged with new Fed Chair Kevin Warsh removing forward guidance and emphasizing price stability at the June Federal Open Market Committee (FOMC) meeting. Against this backdrop, the probability of a rate hike increased, and the 10-year US Treasury yield rose. 

The ICE BofA US High Yield Index returned 2.46% for the quarter, bringing year-to-date performance to 1.89%. BB, B, and CCC rated bonds returned 2.23%, 2.84%, and 2.40%, respectively. Spreads narrowed to 275 basis points (bp) from 328 bp, the average bond price rose to 97.11, and the market’s yield fell to 7.45%. Most industries finished higher with packaging and paper, services, and real estate outperforming, while cable, transportation, and energy underperformed. Trailing 12-month default rates finished the period at 2.67% (par) and 1.76% (issues). The upgrade/downgrade ratio increased to 1.1. Quarterly new issuance saw 125 issues priced, raising $106.0 billion in proceeds. Mutual fund flows were estimated at $8.9 billion. 

For the quarter, the Fund outperformed the benchmark on a NAV basis. Industries contributing the most to performance were financial services, support-services, and retail. Strength in financial services was broad, with holdings in lending and mortgage services having the largest positive impact on performance. Within support-services, issuers in building products, power generation, and equipment rental contributed to the period. Multiple issues from automotive retailers drove performance within the broad retail space. There were no industries that detracted from performance in the period.

The economic outlook is positive for the second half of 2026, supported by the AI buildout, high-income consumer, and downstream effects of pro-growth domestic policies as well as sustained labor market stability and easing geopolitical tensions. Conversely, persistent inflation would be a key economic risk. 

The earnings outlook is also positive. Bottom-up estimates continue to trend higher, driven by better-than-expected results, earnings breadth expansion, robust artificial intelligence spend, broadening investment, productivity gains, and durable margins. On the other hand, rising expenses and input costs are profitability headwinds. 

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 a positive, but below-coupon return for 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 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.