Analysis: European governments defy market volatility with green bond windfall

Analysis: European governments defy market volatility with green bond windfall

Wind turbines from the Mozura wind farm are seen in Ulcinj, Montenegro June 18, 2020. REUTERS/Stevo Vasiljevic/File Photo

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Sep 15 (Reuters) – Eurozone governments have raised 15 billion euros ($15 billion) in green bonds in the past two weeks, pushing volumes above a year ago, even as increased volatility reduces issuance in the broader market.

High inflation and rapidly rising interest rates have injected a level of turbulence into global markets not seen in years, leading to general borrower caution.

But that doesn’t seem to have dampened demand for green government bonds that fund environmentally beneficial projects.

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Belgium on Wednesday became the third European state in two weeks to sell green debt, raising 4.5 billion euros from a new 2039 bond.

Germany raised €4.75 billion in a new five-year bond sale on Aug. 31 and Italy raised €6 billion in a 12-year bond offer last week.

Euro market governments have raised more than 40 billion euros through green bonds so far this year, according to ING Bank, just above 39 billion in the comparable period of 2021.

Bram Bos, senior portfolio manager for green, social and impact bonds at NN Investment Partners, said there was “very strong” momentum in the government green bond market and that the conflict in Ukraine could give new impetus.

“The war in Ukraine is triggering a lot of investment in renewable energy. A lot of it will be funded by governments,” he said. “It’s definitely a trigger for governments to issue more green bonds in the future.”


The growth in sovereign green bond sales contrasts with the broader green bond market, where issuance – which also includes corporates – stood at $278 billion at the end of August compared to $335 billion in the same period of 2021. , according to UniCredit.

It cut its forecast for overall green bond sales this year to $500 billion, down about 10% from last year.

Issuance of corporate green bonds has fallen this year alongside sales of conventional debt, with soaring rates and fears of recession dampening investor demand for corporate debt.

“There is a stronger commitment from governments to keep their green activity at a certain level, if only as a signal to the wider market,” said Benjamin Schroeder, senior strategist at ING.

While corporations are often opportunistic borrowers and more likely to alter their funding plans as market conditions change, sovereigns – having to fund state budgets – are less flexible.

Government issuance has also risen even as “greenium” on debt has fallen in recent months in the secondary market, according to data from ING.

“Greenium” refers to the offering of green bonds at slightly lower yields than conventional debt, reflecting a dedicated investor base seeking a limited pool of such assets.

ING saw the decline as a function of deteriorating liquidity in government bond markets generally.

As a result, governments could face shrinking pricing advantages, but they are still able to tap into an additional pool of sustainable investors focused exclusively on securities such as green bonds, analysts said.

“When I look at our strategies for green bonds, we have record inflows this year, which is remarkable because with most regular bond strategies, they all face outflows,” said Bos of NN Investment Partners.

Maric Post, head of Belgium’s debt agency, estimated that Wednesday’s green bond issue still offered a 1 to 1.5 basis point price advantage over a conventional bond sale.

“In that sense, we believe the green element has given us some improvement in terms and smooth execution in what might otherwise have been a more challenging environment,” he told Reuters.

A banker who handled Italy’s green bond sale last week said the banks arranging the deal factored in election uncertainty when choosing the format. Italy is holding elections on September 25.

“We believed that in this environment, issuing green would bring an additional advantage to Italy and would certainly help secure a very good transaction,” the banker said on condition of anonymity.

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Reporting by Yoruk Bahceli Editing by Dhara Ranasinghe and Mark Potter

Our standards: The Thomson Reuters Trust Principles.

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