Global green bond sales are likely to pick up after declining in the quarter ended June 30, as growing expectations for a US interest rate cut will boost issuance.
Green bond sales fell 5.7% year over year to $150.45 billion in the second quarter as issuance slowed in key Europe and Asia-Pacific markets, according to data from UK-based green bond tracker Climate Bonds Initiative (CBI). Issuance in the April-to-June period was down nearly 16% compared with the first quarter. Nonfinancial corporates and sovereigns drove volumes in the quarter, issuing $51.37 billion and $32.92 billion, respectively.
Meanwhile, the S&P Green Bond Index, which tracks the global green bond market, closed at 127.13 on June 28, down from 127.59 at the start of the second quarter. On July 31, the index closed at 130.26. On the other hand, the S&P Green Bond Select Index, a market value-weighted subset of the S&P Green Bond Index that measures the performance of green-labeled bonds issued globally, closed at 143.03 on July 31, compared with 139.14 on June 28 and 140.10 on April 1.
"Cutting interest rates will obviously become a tailwind for the market," said Yasunobu Katsuki, senior sustainability strategist at Mizuho Securities Co. "The market is factoring in the first rate cut."
Analysts expect the US Federal Reserve to begin cutting interest rates as early as at its policy meeting in mid-September, after the US government reported on July 11 tame consumer price readings for June. While the Fed on July 31 kept the federal funds rate in the 5.25% to 5.5% range, Chair Jerome Powell hinted that a rate cut might come as soon as September.
Powell said the "broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate." Many central banks around the world are likely to follow the Fed in cutting rates.
Regional breakdown
Germany emerged as the top issuer by country with $24.41 billion in issuance volumes in the April-to-June quarter, trailed by France with $22.65 billion and Italy with $15.54 billion. The US, which ended the quarter with $14.39 billion of green debt issuance, came in fourth.
Europe was the largest regional green bond issuer with $91.76 billion in green debt issuance in the quarter, far ahead of $31.24 billion issued by Asia-Pacific entities and $20.01 billion by North American entities. Europe's sales in the second quarter were down from $108.03 billion in the first quarter.
New standards
New standards for green bond sales in the region are expected to support the market. The new norms, to be brought in January 2025, are expected to improve the transparency, comparability and credibility of the green bond market, helping assess the environmental, social and governance stance of issuers. The new rules require deals to be 85% aligned with the EU's green taxonomy as a minimum.
The green bond market may, however, face some challenges. If Donald Trump wins the US presidential race in November, some analysts believe that he may pull the world's largest economy out of the Paris Agreement on climate change. "That will likely tone down [environmental, social and governance] investment," Mana Nakazora, chief ESG strategist at BNP Paribas Japan, said during an online press briefing on July 18.
Trump's campaign pledge also includes a tax reduction to support the fragile nature of the US economy, leading to an increase in a supply of Treasuries to secure fiscal revenue and to higher yields that move inversely to bond prices, economists said.
