JFM Eyes Green Bond Sale to Help Shore-up Sewerage System

Investment-grade corporate bond sales are set to slow in the week ahead, amid monetary policy decisions from the Federal Reserve Open Market Committee (FOMC), as well as from the Bank of England.

Deals in the week ahead could amount to roughly US$20bn, if market conditions remain sufficiently calm, after nearly US$26bn worth of fresh, high-grade debt sales priced in the past week.

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Ultra-low levels of U.S. interest rates have generally been spurring issuers’ desire to sell new bonds. To date in January, a little more than US$134bn of fresh offerings have priced, compared to expectations for roughly US$122bn – and a spike of around 46% more than the prior-year period.

Meanwhile, flight-to-safety purchasing of U.S. Treasuries has generally depressed rates further, amid fears of the global spread of a new deadly coronavirus emanating from China, as well as some downbeat domestic manufacturing data from IHS Markit.

The yield on the 10-year U.S. Treasury note has sunk roughly 18 basis points since its January high of 1.87%, and at the time of writing, was trading at around 1.606%. The yield on the 2-year note has also staged an inversion compared to the 5-year note, with levels in Monday’s pre-market trading at 1.431% and 1.423%, respectively.

Market participants also widely anticipate the Fed to stand pat with its target range on the fed funds rate at 1.50%-1.75%, despite a slower pace of improving operating conditions among manufacturing firms in January.

IHS Markit economist Siân Jones noted that further signs of “historically soft price pressures will come as no surprise to the FOMC,” which should bolster the market’s expectations of a hold in the policy rate. She added that muted increases in costs and output charges “reportedly stemmed from both producers and suppliers increasing their efforts to boost sales.”

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The IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) fell to 51.7 in January from 52.4 in the prior month— the softest level since last October.

And the Bank Played On…

Demand for new offerings has generally been unrelenting, with inflows continuing to pour into corporate funds.

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Refinitiv U.S. Lipper Fund Flows reported almost US$4.2bn having entered investment-grade corporate funds in the week ending January 22, while high yield funds witnessed net inflows of close to US$720m. The activity follows net inflows of more than US$6.6bn and over US$1.7bn in the prior week, respectively.

Indeed, demand for U.S. dollar-denominated corporate debt has generally continued unabated, especially among those global bond investors who have been priced out of their local markets or have a dearth of available paper.

According to Ron Quigley, head of fixed income syndicate at Mischler Financial, spreads on 53% of the 34 investment-grade new issues that priced last week tightened compared to their new issue prices (NIPs), including Adobe’s (Nasdaq: ADBE) single-‘A’ rated, four-part sale, Pemex’s ‘BBB’-rated bond due January 2031, and Target’s (NYSE: TGT) ‘A’-rated 10-year note.

Being Green’s Getting Easier

Against this backdrop, while earnings season blackouts continue to impede the flow of U.S.-based corporate bond sales, several non-domestic issuers have taken advantage of the less congested dollar-denominated debt market to offer new sales, including Bancolombia, the Republic of Colombia, Engie Energia Chile, Pemex, and the Kingdom of Saudi Arabia.

Other overseas-based issuers have graced the near-term radar, including a potential green bond from the Japan Finance Organization for Municipalities (JFM).

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JFM, a joint funding organization, which aims to provide local Japanese governments with long-term funding at low-interest rates, was slated to embark Monday on a series of fixed income investor meetings in Europe to market a green bond in a private placement, as well as debut a euro-denominated deal.

JFM said that through lending to local governments, it contributes to “developing sustainable cities and communities, improves the environment and infrastructure of the region and provides relevant services to its residents.”

The organization noted that Japan’s local governments require “substantial funds to build and maintain public facilities such as water supply and sewerage systems, roads, schools, and hospitals,” while covering around 60% of the nation’s total public expenditure.

As of March 31, 2019, JFM’s total outstanding loans stood at ¥23.5tn (US$211.9bn), of which over ¥7.4tn (US$66.7bn) was for sewerage –sustainable water and waste management projects that are intended to contribute to a sustainable economy and promote public health. In fact, sewerage projects comprise the lion’s share of JFM’s loan portfolio, accounting for 31.6% of its total loans at the end of March 2019.

JFM’s potential near-term green bond sale contributes to a growing mountain of sustainability-related debt, which has been generally rising in tandem with the popularity of Environmental, Social and Governance (ESG) issues within political and corporate spheres – as recently exemplified in key meetings at the 2020 World Economic Forum in Davos, Switzerland.

Green Deals Set to Grow Across the Globe

Moody’s Investors Service analyst Matthew Kuchtyak recently noted that “sustainability-linked loans and bonds, such as the one issued by ENEL S.p.A. in October, will increase in frequency moving forward, as they allow issuers to highlight the broader sustainability objectives of their organizations while retaining the flexibility of general corporate purposes borrowing.

“At the same time, the growth of these transactions will complement, rather than restrict, the growth of the labeled green, social and sustainability bond markets over the next few years.”

Kuchtyak added that “investments in climate adaptation and resilience projects will increase over time, as evidenced by the European Bank for Reconstruction and Development’s debut climate resilience bond and the newly-launched Climate Resilience Principles.”

Indeed, more nations have announced green bond issuance in 2020, including Germany and Sweden.

German finance minister Olaf Scholz said that its green bonds, which will be pegged exclusively for financing green projects, will be offered as “twin bonds”, meaning they will be sold alongside conventional federal bonds (Bunds) with the same maturity and coupon.

Scholz continued that these green issues will “eventually be issued at all standard maturities, with the aim of appealing to longer-term investors, such as pension funds and insurance companies, as well as those on the short-term end of the spectrum, such as central banks.”

He added that this would enable Germany to become the benchmark issuer of green bonds on the euromarket, as well as help the country towards becoming a leading center for sustainable finance – one of the aims set out in the 2030 Climate Action Program.

Investors appear to be benefiting by exposure to investment-grade global green bonds, with the iShares Global Green Bond exchange-traded fund (Nasdaq: BGRN) having gained around 6.76% since it set its most recent 52-week low in late January 2019.

The ETF primarily holds corporate (~67.8%) and sovereign debt (~29.8%) from France (~21.2%), the Netherlands (~11.5%), the U.S. (~10.5%) and Germany (~10.3%) in the banking (~26.6%) and electric (~20.1%) sectors.

Chile Reception

However, not all green bonds have had positive performance.

In other regions such as Latin America, the Republic of Chile recently sold ‘A’-rated green bonds due January 2032 at a spread of 80bps more than matched-maturity U.S. government notes. The deal, which came with a 2.55% coupon, was quoted at the end of last week bid 8bps wide of that NIP. The Chilean government also reopened its 3.5% bond due 2050 at a spread of 105bps more than comparable U.S. Treasuries, only to find it bid 5bps cheaper to its new pricing.

Investors will likely be keeping a close eye on developments in the green bond market, as well as the ever-rising levels of corporate debt, amid still-ultra low U.S. interest rates.

As of January 8, 2020, total corporate bond issuance – investment-grade and junk bonds combined – tallied 5.8% higher year-on-year to a nosebleed level of nearly US$1.41tn, according to data compiled by the Securities Industry and Financial Markets Association (SIFMA).

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For now, new corporate debt issuance in the week ahead will most likely come ahead of the FOMC’s and BoE’s decisions, or in the front part of the week.

In the meantime, use the global bond scanner in the IBKR Trader Workstation to locate corporate bonds that are available to trade in the secondary market, along with U.S. Treasuries, municipal bonds, non-us sovereign debt and more.