August 2021: higher interest rates, higher share prices

August 2021 marked a turn-around in the interest rate picture, as long-term interest rates climbed again for the first time since April. This was hardly felt in the equity markets, however, which ‘simply’ continued going up unabated.

After relatively strong rate increases in the first few months of 2021, long-term interest rates had shown a limited drop since May. In August, the interest rate picture resumed its upward trajectory. On balance, yields on most European government bonds are higher than they were at the beginning of the year. This is reflected in government bond yields, which were negative in August and have also been negative for 2021 to date. Corporate bonds show a more mixed picture. Higher interest rates are bad for corporate bond yields, but thanks in part to the ECB’s bond buying programme and investor risk-on sentiment, corporate bonds have in fact been outperforming government bonds. This was especially true for the riskier high yield corporate bonds, which outperformed investment grade corporate bonds in August and have done so for FY2021 to date.

Equity markets in turn outperformed corporate bonds in August, and have done so in FY2021 to date. At the regional level, least popular in the first seven months were Asian equities and emerging markets, but European equities in particular lagged slightly in August, with the MSCI Europe index posting a 2.0% return. Yield differences between the other regions were very limited, with average monthly yields of around 3% for all equity regions outside Europe. Equity markets in Europe and the US showed a year-on-year rise of more than 30%, whereas price gains on Asian equities and emerging markets have been ‘limited’ to a still fairly impressive 20%.

Finally, at a yield of 1.8% European listed property performed pretty much in line with the broad European equity market in August. At approx. 22% on an annualised basis, however, yields on European listed property did lag behind European equities.