Voya Short Duration High Income Fund Quarterly Commentary - 4Q24
Capital preservation emphasis, investing in high-yield corporate debt while seeking to minimize credit, liquidity, and interest rate risks.
Portfolio review
The HY bond market finished higher in the quarter. November’s U.S. election results and the new administration’s anticipated agenda were the primary drivers of market gains. In addition, corporate earnings results were broadly positive, with most companies exceeding top- and bottom-line consensus estimates. On the economic front, fourth quarter real gross domestic product (GDP) growth estimates trended higher. Initial jobless claims remained low, consumer sentiment increased and inflation measures were generally in-line with expectations. The services sector continued to expand, while the manufacturing sector continued to contract. The U.S. Federal Reserve (Fed) cut its benchmark interest rate twice—a total of 50 basis points—to a range of 4.25–4.50%. At December’s Federal Open Market Committee meeting, the central bank also updated its summary of economic projections for 2025, decreasing its forecast for interest rate cuts and employment, while increasing its forecast for real GDP growth and inflation. Against this backdrop, the 10-year U.S. Treasury yield rose, steepening the yield curve and pressuring risk assets and core fixed income into quarter end.
The ICE BofA US High Yield Index returned 0.16% for the period. CCC rated bonds returned 2.45%, outperforming BB and B rated bonds, which returned –0.50% and 0.34%, respectively. Spreads narrowed to 292 basis points (bp) from 303 bp, the average bond price fell to 95.48, and the market’s yield rose to 7.65%. Industry performance was mixed for the period. Telecoms, transportation and media outperformed whereas healthcare, real estate as well as packaging and paper underperformed. Trailing 12-month default rates declined to 1.47% (par) and 1.02% (issues). The upgrade to downgrade ratio decreased to 0.9. New issuance saw 76 issues priced, raising $49.1 billion in proceeds. Mutual fund flows were estimated at $0.9 billion.
For the quarter, the Fund outperformed the benchmark on a NAV. At the industry level, energy, media and air transportation made the largest positive contributions to performance in the period. Utilities, retail and automotive were the largest detractors from performance.
Current strategy and outlook
The U.S. economy should continue to expand in 2025, supported by earnings growth, further Fed easing as inflation and the labor market continue to normalize, and the new administration’s pro-U.S. growth policies.
Apart from these factors, steady consumer spending, ongoing services sector expansion, continued fiscal spending and improving productivity aided by the proliferation of artificial intelligence are growth tailwinds. Risk to the economy may increase if these trends weaken. Other considerations include tariff and immigration policies, geopolitical tensions, prolonged labor market softening, continued manufacturing contraction and economic weakness outside of the U.S.
The U.S. HY market, yielding over 7%1 , is expected to deliver a coupon-like return in 2025 with upside possible. 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. Increased merger and acquisition activity and deregulation could also have a positive market impact. In this environment, new issuance is expected to remain elevated, the default rate should stay below the historical average of 3–4%, and spreads can remain tight.
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 outperformed 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.