Germany is selling its first ever green government bond, in a deal that is seen as a landmark step in the development of Europe’s green bond market. The hope is that it will help establish a benchmark for pricing other green transactions.
The German Treasury attracted more than €30bn of bids for up to €6bn of 10-year debt. The bond is being sold as a twin of its outstanding Aug 2030 bond.
This means that once the bonds have been sold, investors will be able to exchange their green bonds for the conventional equivalent at any times. The structure will mitigate any liquidity concerns that smaller, less liquid green securities would trade at a lower price.
The ministry will seek to ensure the price of the green twin is always at least that of the conventional bond, by purchasing green bonds if it falls below that level.
Market participants will be closely looking at the yield which is expected to be around minus 0.45% – similar to the one on its mainstream twin.
Overall, Germany is expected to issue up to €12bn this year, across a range of maturities from two to 30 years.
In general, green bonds have enjoyed a surge of interest in recent years, as investing in environmental, social and governance linked securities has gained momentum in fund management circles. Figures from Moody’s shows that a total of $263bn of this type of debt was sold last year, up from less than $1bn a decade ago.
“The green bond market was already in the ascendency, with issuance growing annually in recent years, but the move by Germany to issue its first ever green bond could open the floodgates,” says Johann Plé, portfolio manager at AXA Investment Managers.
He adds “the current rate of issuance – there is expected to be around $200bn of green bonds issued in 2020 – is going to look small compared to the growth we will see in the next few years, especially as sovereigns enter the market, “As such, we think the overall market size could grow to $1trn by the end of 2021, but it will still only account for a small percentage of the overall debt markets, so it truly is at the start of its journey.
“If you see a Biden presidency, and if other governments follow Germany and Sweden’s moves to launch green government bonds, we expect it to really take-off,” says Plé.