Barclays Says Green Bond Investors Pay More for Less Liquidity

(Bloomberg) -- Demand is so strong for green bonds, or debt that funds environmentally friendly projects, that investors are accepting lower yields for securities that are harder to trade, according to Barclays Plc.

Barclays looked at trading volumes across U.S. dollar and euro-denominated investment-grade markets, and found that green bonds trade less often than corporate bonds in general. Meanwhile, new environmentally friendly bonds tend to yield about 0.04 percentage point less, even after record issuance of the securities, Barclays strategists led by Charlotte Edwards and Bradley Rogoff wrote in their report. 

The results confirm what investors have long suspected: that more investors in green bonds are of the buy-and-hold variety, including pension funds, asset management arms of insurance companies and mutual funds, rather than active traders. But the findings also imply that if many investors decide to liquidate their holdings at some point, they may be disappointed by demand in the secondary market.   

Newly issued green bonds denominated in U.S. dollars do trade more often than the broader market, Barclays found, but after three months that shifts, with the environmentally-linked debt trading with reduced frequency. For euro-denominated debt, green notes trade less than average from the start.  

Borrowers are taking advantage of the robust demand to fund environmental projects. Corporations and governments globally have sold a record $411 billion of green bonds so far this year, compared with $234 billion raised in all of last year, data compiled by Bloomberg show. Global sales of environmental, social and governance bonds are also at a record and are expected to hit $1 trillion by end of this year.

Firms have long been able to get cheaper funding by selling green bonds, but even with record issuance that benefit has only shrunk marginally, by just 1 basis point from the peak of 5 basis points earlier this year. Barclays expects demand to support a greenium of 4 basis points to 5 basis points over the medium term, assuming elevated issuance. 

Read more on the ESG Bond Weekly: Greenium Resists Supply Pressure, Barclays Says

The strategists screened the U.S. high-grade market for green bonds trading with yields well below similar non-green debt, on the thinking that the divergence “is likely not justified” longer term. 

“For holders of green bonds who are less concerned about the green label, swapping into similar maturity non-green bonds makes sense, in our view,” wrote the strategists.

Elsewhere in credit markets:

Americas

Goldman Sachs Group Inc. is tapping the U.S. investment-grade bond market, following peers Bank of America Corp. and Morgan Stanley in selling new debt after posting third-quarter results. The bank is selling bonds in as many as five parts, according to a person familiar with the matter.

• Goldman Sachs strategist Michael Puempel says continued strong deal-making activity could present credit-return risks for the companies purchasing bigger targets in a more “shareholder-friendly” way
• Bond markets have gone overboard pricing in interest-rate increases by the Federal Reserve given all signs still suggest the inflation threat will prove temporary, according to Scott Thiel, chief fixed-income strategist at BlackRock Inc.
• PGIM Fixed Income said Jason Appleson will assume the role of head of municipal bonds effective Jan. 1, 2022 upon the retirement of Susan Courtney
• For deal updates, click here for the New Issue Monitor
• For more, click here for the Credit Daybook Americas

Europe

Europe’s primary market saw its first deal being postponed since the summer, with Triodos bank postponing a green tier-2 note, taking the shine off a flurry of new mandates mostly from the financials sector.

• Just one deal priced, but a string of new deal announcements from the likes of DBS Bank Ltd, Hitachi Capital Corp and Cerba Healthcare suggest the pace of activity will pick up from tomorrow
• In spite of the risk-off mood sweeping markets, Spanish telecom operator Masmovil has tapped investors to lower the costs of a 2.2 billion-euro leveraged loan
• “The funding window remains open, though black-out periods stand in the way of a major acceleration in issuance during the second half of October,” Commerzbank’s strategists wrote
• Meanwhile, the Bank of England will likely cut its target for corporate bond purchases in the energy sector as it implements measures to greenify QE, Barclays strategists led by Zoso Davies write in a note

Asia

Asia’s primary dollar-bond market turned busier Monday, as companies rushed to sell or prepare for new debt offerings before inflationary pressures push borrowing costs even higher. 

• The faster pace of deals also comes after Chinese central bank officials said the risks from China Evergrande Group’s debt crisis are controllable
• China’s benchmark 10-year bond yield rose to the highest in three months as hopes of monetary policy easing faded after central bank officials downplayed risks from inflation
• Five borrowers hired banks for future issuance, including China’s Ministry of Finance and Indonesia’s instant noodle giant PT Indofood CBP Sukses Makmur

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