February 2021: the R (of reflation) is in the month

While financial markets still seemed slightly indecisive at the start of the year, one theme clearly dominated in February: ‘reflation’. Expectations of rising inflationary pressure in the course of 2021 benefited equities, but put pressure on government bond prices.

February 2021 saw extraordinary price swings in many markets, but the most significant movement was probably the bond market interest rate increase, which put pressure on government bond prices. The government bond yields of almost all major countries have climbed by several tens of basis points since the beginning of the year. Long-term government bond yields outpaced short-term government bond yields, resulting in a ‘steepening of the curve’, to use bond jargon. For investors in European government bonds, this translated into a negative yield of around 2% on average in February. Higher interest rate levels also weighed down corporate bond yields, but this blow was cushioned to some extent by increased investor risk appetite, limiting European corporate bond losses to around 1% in February. The riskier European high yield corporate bonds even delivered a slightly positive yield of around 0.5%.

Higher government bond yields have not presented an obstacle to higher equity prices so far this year. Notably, January’s best performing equity regions – Asia and emerging markets – in fact lagged behind Europe and the US in February. The MSCI Asia Pacific index delivered a +1.9% yield in euros in February and the MSCI Emerging Markets index added +1.3%. The MSCI Europe and MSCI North America indices achieved positive yields of 2.5% and 3.2%, respectively, in February. The yield gap between developed and emerging markets narrowed in the first two months of 2021, with the MSCI World Developed Markets index yielding 3.1% and the MSCI Emerging Markets index 5.6%.