Navigating Trade Uncertainty: Strategic Fixed Income Opportunities in a High-Yield Environment

In the first half of 2025, global financial markets grappled with unprecedented trade policy shifts, including the abrupt imposition and subsequent reprieve of U.S. tariffs—a period dubbed “Liberation Day.” These developments created a volatile environment for fixed income investors, testing the resilience of core plus strategies. Amid this turbulence, the Voya Core Plus Fixed Income SMA emerged as a standout performer, leveraging tactical positioning in commercial mortgage-backed securities (CMBS), collateralized loan obligations (CLOs), and high-quality corporates to outperform its benchmark. This article examines how duration management, sector rotation, and a quality bias enabled the strategy to capitalize on relative value, while offering actionable insights for investors navigating today's high-yield landscape.

Duration Management: Balancing Risk and Reward

The initial tariff shocks in early 2025 triggered a sharp sell-off in U.S. Treasuries, pushing yields higher and penalizing longer-duration portfolios. Voya's Core Plus SMA, however, mitigated this risk through a disciplined approach to duration. While the portfolio maintained a slightly longer duration profile than its benchmark, it actively adjusted exposure to align with macroeconomic signals. For instance, the strategy reduced duration in response to rising rate expectations during the quarter, limiting losses as the Federal Reserve signaled tighter monetary policy.

Investors should consider dynamic duration management as a cornerstone of core plus portfolios. In a high-yield environment, extending duration in sectors with strong credit fundamentals—such as CMBS and CLOs—can enhance returns without exposing the portfolio to excessive interest rate risk.

Sector Rotation: Capitalizing on Securitized Credit

The SMA's outperformance was driven by its strategic overweight in CMBS and CLOs, which offered attractive spreads and diversification benefits. In CMBS, the portfolio focused on higher-yielding private label deals, which benefited from an early-stage recovery in commercial real estate fundamentals. Similarly, its CLO allocation prioritized AAA-rated tranches, which traded at spreads over 130 basis points wider than comparable corporate bonds at quarter-end.

Securitized credit markets, particularly CMBS and CLOs, remain compelling for investors seeking yield in a low-growth environment. These sectors offer structural advantages, including diversified collateral pools and predictable cash flows, which can buffer against trade policy shocks. However, careful selection is critical: investors should target assets with strong underlying collateral and avoid overexposure to sectors with weak fundamentals.

Quality Bias: Navigating Corporate Credit Volatility

While the SMA's overweight in investment-grade (IG) and high-yield (HY) corporates contributed to its performance, it also faced headwinds as rising rates pressured longer-dated corporate bonds. The portfolio's higher quality bias—favoring issuers with strong balance sheets—helped it avoid the worst of the sell-off in lower-rated credits. However, this approach also limited upside in sectors where speculative-grade bonds rallied on improved liquidity conditions.

The lesson for investors is clear: a quality bias should be balanced with tactical flexibility. In a high-yield environment, maintaining a core of high-quality credits while selectively rotating into attractively priced speculative-grade sectors can enhance risk-adjusted returns. For example, Voya's strategy included up to 20% in below-investment-grade securities, allowing it to capture opportunities in early-cycle rallies without compromising overall portfolio stability.

Actionable Strategies for 2025 and Beyond

1. Rebalance Duration Exposure: Monitor central bank signals and adjust duration to align with rate expectations. In a rising rate environment, prioritize shorter-duration, high-conviction credits.
2. Target Securitized Credit: Allocate to CMBS and CLOs with strong collateral quality and spreads that reflect their risk profile. Avoid sectors with stretched valuations, such as overleveraged commercial real estate.
3. Maintain a Quality Core: Preserve a foundation of high-quality corporates and Treasuries to anchor the portfolio during volatility. Use active security selection to identify undervalued credits in sectors like utilities or infrastructure.
4. Leverage Active Sector Rotation: Shift allocations based on macroeconomic cycles. For instance, overweight CLOs during periods of credit expansion and tilt toward CMBS during real estate recoveries.

Conclusion

The Voya Core Plus Fixed Income SMA's success in 2025 underscores the importance of strategic agility in a volatile trade environment. By combining duration discipline, sector rotation, and a quality bias, the strategy not only navigated policy-driven turbulence but also capitalized on relative value in securitized and corporate credit markets. For investors seeking to replicate this approach, the key lies in balancing defensive positioning with proactive opportunities—particularly in sectors where spreads and fundamentals align. As trade uncertainty persists, core plus portfolios that prioritize flexibility and credit quality will be best positioned to thrive.