The green bond market is heating up again with investors bracing for a potential record month of sovereign sales.
Spain, Colombia and the UK are due to offer their inaugural green bonds this month, with the latter expected by British Chancellor of the Exchequer Rishi Sunak to “certainly be the largest” in the world.
That is in addition to established issuer Germany, which is to auction a new 10-year green bond next week.
All that could soon be dwarfed as the EU prepares to enter the market, with 30 percent of its 800 billion euro (US$950.7 billion) COVID-19 pandemic recovery funding slated for green projects.
The bloc is to hold a call Wednesday with investors to provide more details on its plans.
“Based on the way the pipeline is building, we could see a month for record issuance,” Deutsche Bank AG environmental, social, and governance advisory head Trisha Taneja said. “This is typically the time that most issuers want to go to market, right after Labor Day.”
Sovereign green sales could be at least 20 billion euros this month, NatWest Markets rates strategist Imogen Bachra said.
That would test a monthly all-time high set in March, when Italy made a record-breaking debut, and top issuer France sold more debt.
Since the first sovereign green bond was issued by Poland in 2016, momentum has grown with more issuers coming on board. Governments from around the world sold US$39.1 billion in green bonds so far this year, already surpassing a total of US$37.5 billion in all of last year, Bloomberg Intelligence data showed.
That issuance boom has been led by European countries such as France, Italy and Germany, although developing economies are now joining in.
Hong Kong and Chile were the largest emerging-market issuers this year, with Benin selling Africa’s first sovereign social bonds.
Supply is just catching up with investor demand, with concerns over greenwashing — overstating environmental benefits — less of an issue in the European sovereign market.
All of the region’s green sovereign bonds trade rich on the curve versus their conventional counterparts, in a so-called “greenium,” and that is unlikely to change even in a record-breaking year, Bachra said.
“I feel there is cash available after summer to deploy and would not expect too much pressure on pricing,” Degroof Petercam fund manager Ronald van Steenweghen said, adding that he would like to see more issuance in five to 10-year tenors.
“Most new sovereign issues have been well telegraphed in advance and demand remains very strong, partially due to regulatory changes,” he added.
The biggest deal this month is a British green gilt bond maturing in 2033. Other eurozone debuts might come next year from the likes of Austria and Greece, although by then, individual sovereign sales should be dwarfed by the EU.
“I think everyone will try to have their own green bond, but the EU issuance is definitely what everyone should focus on,” Societe Generale SA senior rates strategist Jorge Garayo said. “This month may be big because you have Germany and Spain, but it’s not going to be the biggest.”
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