Voya Enhanced Yield Fixed Income SMA Quarterly Commentary - 2Q25

The second quarter of 2025 opened with a surge in global trade tensions as the U.S. implemented sweeping tariffs on a broad range of trading partners. The move branded “Liberation Day,” caught markets off guard with tariff rates significantly higher than expected. The tariffs imposed on China stood out since the severity of the levy—along with further escalation and retaliatory measures—effectively erased the economic incentive for U.S.-China trade. Markets reacted swiftly and negatively: equities dropped into correction territory, credit spreads widened sharply—many sectors hit 12-month wides—and U.S. Treasuries, which had been rallying on expectations of slower growth, sold off as investor sentiment toward U.S. assets deteriorated. Just days later, the U.S. administration announced a temporary reprieve, significantly reducing tariff rates to allow for negotiations. This reprieve, set to expire on July 9, 2025, helped stabilize markets. Although uncertainty remained, the easing of trade tensions allowed risk assets to recover gradually through the remainder of the quarter. 

In fixed income markets, this uncertainty translated into heightened volatility. Treasury yields initially spiked on the tariff news, then retraced as the reprieve and softer inflation data took hold. Credit markets experienced a sharp widening in spreads early in the quarter, followed by a partial recovery as risk sentiment improved. Investors remained focused on balancing trade uncertainty against the potential for a soft landing. 

Overall, the second quarter of 2025 was a study in contrasts: geopolitical shocks met with central bank restraint, economic weakness offset by labor market strength, and inflation easing just as new risks to price stability emerged. As the July 9, 2025, tariff reprieve deadline approaches, markets remain on edge, with the next chapter in trade policy likely to shape the trajectory of both the economy and financial markets in the second half of the year.

For the quarter, the Voya Enhanced Yield Fixed Income SMA outperformed the custom benchmark on a gross-of-fees basis but underperformed on a net-of-fees basis. The SMA’s higher quality focus within high yield (HY) corporates was a positive to relative performance, while sector allocation was a modest detractor given the SMA’s underweight in HY bonds.

Looking forward, our outlook is shaped by a complex mix of policy shifts, structural labor dynamics, and evolving inflation trends. Corporate investment has slowed in response to trade volatility, and higher import costs are expected to weigh on consumption. However, proposed tax cuts would support household incomes while deregulation efforts should improve business efficiency. As a result, we expect growth to slip below trend in the near term, but stage a gradual rebound further out. 

For fixed income investors, elevated yields offer the potential for attractive total returns however, policy uncertainty will continue to drive episodes of volatility. That said, the current administration’s sensitivity to bond market reactions should help limit the severity and duration of these disruptions, but we will remain nimble. 

Credit markets have largely recovered from the “Liberation Day” shock, with spreads tightening back to levels that are not necessarily screening as cheap. As of quarter-end, investment grade (IG) corporate spreads were just 83 bp, a level that suggests markets are once again pricing in a near-perfect scenario. While corporate fundamental factors remain supportive, spreads at these levels leave little room for error, particularly as it relates to trade or policy risk. 

In summary, our outlook is one of cautious optimism. Growth is likely to remain subdued in the near term but should improve as clarity on trade emerges, a more favorable mix of policies are implemented, and productivity gains take hold. Inflation is well off its peak, expectations remain anchored, and the U.S. Federal Reserve is poised to ease policy in response to labor market softening. While credit valuations in corporate sectors appear stretched, the fundamental picture is broadly positive. Navigating this environment will require selectivity, but the backdrop remains supportive.