September 2021: interest rates up further, but equities not

September 2021 – finally – brought a turn-around in investor sentiment: For the first time since October 2020, equity prices showed a clear decline. Long-term interest rates did continue to rise, however.

While long-term interest rates in both Europe and the US had dropped by around 25 basis points in the first half of Q3, the picture was reversed in the second half of the quarter, particularly so in September. This meant that European government bond yields were negative in September, whereas yields for the entire third quarter were exactly 0%. Long-term interest rates are still elevated for the whole of 2021, making European government bonds the worst performing asset class so far this year. That said, 10-year yields in the Netherlands and Germany are still slightly negative in absolute terms, despite this year’s interest rate increases. In the UK interest rates rose to 1% for 10-year yields, exceeding 10-year yields in Spain (0.4%) and Italy (0.8%), for example.

Higher interest rates also depressed corporate bond yields in September, although they were less negative than government bond yields. In the third quarter as a whole, corporate bond yields were just positive, with high yield bonds slightly outperforming investment grade bonds.