Sector selection seems to be a major component of bond market returns in 2016. On a total return basis the bonds of companies in the S&P 500 Index have been outperforming the stocks of those companies in 2016. A closer look reveals that as the yield starved market pushed yields down the higher yielding sectors of the bond markets have been what is driving the performance of the bond market.
Through the first three quarters of 2016, the S&P 500 Bond Index has seen a total return of over 8.9% year-to-date while the S&P 500 Index has returned over 7.8%. The higher yielding sectors of Energy, Materials, Telecommunications and Utilities combine for a weight of 24% of the index and each sector has seen robust performance in 2016 so far, The two leading sectors are the S&P 500 Energy Corporate Bond Index returning over 16% year-to-date and the S&P 500 Materials Corporate Bond Index returning over 14%.
The drag on the corporate bond market is coming from the largest sector in the S&P 500 Bond Index, the Financials sector. The S&P 500 Financials Corporate Bond Index, representing 25% of the index by market value has returned just over 6.25% year-to-date.
Table 1) Select indices, their returns and yields as of September 30th 2016: