Green bonds have premiums and that’s just the start

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The green bond market is still in its infancy, and so is the VanEck Vectors Green Bond ETF (NYSEArca: GRNB), but it is clear that momentum is building in this space.

In addition to the case of GRNB, which is only four and a half years old, there is the fact that the dynamics of green bonds are built on the basis of credible dynamics. For example, companies issued $ 200 billion in green debt earlier this year, and green bond issuance in 2021 has already eclipsed the annual record.

Green bond issuance could continue to rise because, as research from the Climate Bonds Initiative (CBI) suggests, there are benefits to selling this form of debt.

“Companies issuing green bonds continue to enjoy financing cost advantages over their vanilla debt, new research shows, and industry players do not expect this so-called greenium to disappear from the market. so early. according to S&P Global Market Intelligence.

Green bond spreads

As S&P Global notes, the CBI has rated 75 green bonds, constructing yield curves for 33 of those issues. 11 are priced inside their yield curves while 15 others are priced right on their curves, indicating that some green bonds are just as or more profitable than traditional corporate debt. This is especially true for green bonds denominated in dollars.

“Green bonds denominated in US dollars have shown particularly strong pricing results, according to the study. The average oversubscription for this category was 4.7x for green bonds and 2.5x for vanilla equivalents, while the spread compression was on average 29.9 basis points for green bonds and 24.8 bp for vanilla bonds, ”notes S&P Global.

This is relevant to the GRNB thesis because almost all exchange traded funds 291 farms are denominated in dollars. The S&P Green Bond US Dollar Select Index, the underlying index of GRNB, only holds bonds denominated in dollars, including corporate, government and supranational bonds.

The need for more capital to finance renewable energy projects, coupled with strong investor demand, could lead to increased green debt issuance, and there are benefits for issuers as well. ING research indicates that global green debt issuers are saving 1 to 10 basis points on sales of green bonds compared to traditional corporate debt.

For more news, information and strategy, visit the Beta Beyond Basic channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon and may not come to fruition. The information on this site should not be used or interpreted as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.


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