Fixed income
US short duration high yield: income without the rate call?
Even as the global economic outlook remains clouded in uncertainty, attractive income need not come with a large bet on the direction of interest rates.
Key takeaways
- US short duration high yield bonds limited the damage of rising US Treasury yields in the third quarter of 2026, proving their value as a shock absorber.
- Data since 2009 shows short duration high yield bonds have captured most of the return offered by high yield bonds with less volatility.
- With low sensitivity to interest rates and good visibility on issuers’ creditworthiness, these assets may be an attractive complement to core fixed income.
The third quarter was challenging for longer-dated government bonds as yields rose to multi-year highs – the all-important yield on 10-year US Treasuries hovering at about 5% since September 2026. These adjustments caused pain for those exposed to the long end of the curve.
Volatility in fixed income markets has prompted investors to refocus on diversification to help manage the impact. In this environment, short duration high yield bonds may be an attractive option, with a history of performing well in both rising and falling rate environments and offering strong risk-adjusted returns.
Short duration high yield – a complement to your core?
The sharp rise in Treasury yields in the third quarter was a timely reminder of the diversification benefits that short duration high yield bonds can bring to a core fixed income allocation. During the quarter, short duration high yield bonds declined 1.21%, compared with a 3.51% loss for the broad US fixed income index.1
The events demonstrate the defensive benefits of investing in short duration fixed income. Investors holding shortterm bonds are less exposed to the impact of rising interest rates, which can make them a useful choice when rates are going up.
But short duration high yield isn’t only useful in periods of rising rates: historically, these assets have helped cushion negative core bond returns while retaining meaningful participation when broader fixed income markets rally. Put another way, they have delivered positive returns in both up and down rate environments (Exhibit 1).
Exhibit 1: Short duration high yield has performed well in both up and down rate environments
As of 30 September 2026. Source: Bloomberg, Voya IM.
Volatility ahead – plan to reduce rate dependency
The prospect of further rate volatility means investors must plan for a variety of different scenarios. Adding short duration high yield to a core allocation may offer an efficient way to achieve this. If yields rise, lower rate sensitivity can help limit price pressure. If yields fall, income and credit exposure can continue to support total returns.
We think current yield and duration profiles support the case for short duration high yield bonds. These assets currently offer more yield – see “yield to worst” – than the broad high yield or investment grade indices, with the shortest duration of the three markets (Exhibit 2).
Exhibit 2: Short duration high yields currently offer attractive yields with low duration risk
As of 30 September 2026. Source: Bloomberg, Voya IM. SDHY = short duration high yield. HY = high yield. IG = investment grade. See notes for index definitions.
Long-term trends support the case for short duration high yield
Importantly, these advantages are not temporary. Long-term data shows that short duration high yield bonds have consistently rewarded investors relative to other fixed income asset classes. Since 2009, for example, short duration high yield has captured nearly all of the broad high yield index’s return with less volatility, while meaningfully outperforming investment grade bonds (Exhibit 3).
As a result, it has produced the strongest risk-adjusted returns of the three markets, as measured by both Sharpe and Sortino ratios.
This is equivalent to saying these bonds have delivered more return per unit of risk than either broad high yield or investment grade bonds. That favourable trade-off has historically translated into strong long-term results.
Exhibit 3: Short duration HY offers most of high yield’s return, with less risk
As of 30 September 2026. Source: Bloomberg, Voya IM. SDHY = short duration high yield. HY = high yield. IG = investment grade. See notes for index definitions.
Income without a large duration bet
We see the current environment as constructive for short duration high yield: yields provide an attractive starting point for returns while relatively low duration limits exposure to further volatility in the Treasury market. And default risk appears contained by solid issuer fundamentals and limited near-term refinancing needs, although tight spreads underscore the importance of disciplined security selection.
For a range of investors, we believe short duration high yield bonds can serve as a strategic complement to core fixed income – adding income, reducing portfolio-level rate sensitivity, and improving the potential for risk-adjusted returns across market cycles.
