Voya Strategic Income Opportunities Fund Quarterly Commentary - 4Q24

Strong economic data continued to come through in the final quarter of 2024, which had the impact of driving spreads tighter while reversing the rate rally experienced in 3Q24. The gross domestic product (GDP) report for 3Q24 once again came in elevated (initially reporting at 2.8% and later revised to 3.1%) driven largely by strong consumer and government spending, which grew at 3.7% and 5.1%, respectively. Notably, consumer spending accounted for roughly 80% of the overall growth, highlighting its critical role in the economy. 

Inflationary pressures remained a key concern. The Consumer Price Index (CPI) surprised to the upside in early October, and while subsequent data showed stability in both CPI and Personal Consumption Expenditures (PCE) inflation, both remained elevated. Core PCE, the Fed’s preferred measure of inflation, finished the quarter at 2.8% year over year, slightly above where it was trending in the summer. Notably, core goods prices, which had experienced a deflationary trend for several months, began to reaccelerate.

Labor market dynamics continued to show signs of softening without entering a state of deterioration. Job gains remained reasonable, and although the unemployment rate resumed its upward trajectory, it remained below the high watermark set earlier in the year. Meanwhile, wage growth remained strong, which helps explains both the resilience of consumer spending and the stickiness of services inflation. 

While the Fed continued to deliver rate cuts at both the November and December meetings, the December cut was accompanied by more "hawkish" elements. Specifically, the Fed's Dot plot indicated only two cuts projected for 2025—down from four in the previous iteration. Additionally, officials moved their projection for both growth and inflation higher, while their projection for the unemployment rate moved lower and only slightly above the current level. 

Overall, the fourth quarter of 2024 was characterized by resilient labor market dynamics, strong economic growth and sticky inflation. The impact on fixed income performance was mixed, with yields rising and credit spreads tightening, leading to modestly negative total returns for most fixed income sectors. 

Sector allocation along with security selection decisions contributed over the quarter while duration and yield curve decisions detracted over the period, where the rate rally seen in the previous quarter reversed course as inflation concerns and a more cautious Fed led to markets repricing yields higher. Our overweight to securitized credit contributed broadly over the period. The non-agency residential mortgage-backed securities (RMBS) and credit risk transfers (CRT) sector was the largest contributor, where spreads tightened on positive economic fundamental factors and optimism for future policies. Allocation to corporate credit also contributed, albeit to a lesser extent. Additionally, positive security selection results in agency mortgages were realized due to our allocation to off-benchmark collateralized mortgage obligations (CMO) which outperformed despite the underperformance of Index constituents.

Labor market dynamics continued to show signs of softening without entering a state of deterioration. Job gains remained reasonable, and although the unemployment rate resumed its upward trajectory, it remained below the high watermark set earlier in the year. Meanwhile, wage growth remained strong, which helps explains both the resilience of consumer spending and the stickiness of services inflation. 

While the Fed continued to deliver rate cuts at both the November and December meetings, the December cut was accompanied by more "hawkish" elements. Specifically, the Fed's Dot plot indicated only two cuts projected for 2025—down from four in the previous iteration. Additionally, officials moved their projection for both growth and inflation higher, while their projection for the unemployment rate moved lower and only slightly above the current level. 

Overall, the fourth quarter of 2024 was characterized by resilient labor market dynamics, strong economic growth and sticky inflation. The impact on fixed income performance was mixed, with yields rising and credit spreads tightening, leading to modestly negative total returns for most fixed income sectors. 

Sector allocation along with security selection decisions contributed over the quarter while duration and yield curve decisions detracted over the period, where the rate rally seen in the previous quarter reversed course as inflation concerns and a more cautious Fed led to markets repricing yields higher. Our overweight to securitized credit contributed broadly over the period. The non-agency residential mortgage-backed securities (RMBS) and credit risk transfers (CRT) sector was the largest contributor, where spreads tightened on positive economic fundamental factors and optimism for future policies. Allocation to corporate credit also contributed, albeit to a lesser extent. Additionally, positive security selection results in agency mortgages were realized due to our allocation to off-benchmark collateralized mortgage obligations (CMO) which outperformed despite the underperformance of Index constituents.