Impact Blog
Green bonds and the broad bond market: Compare and contrast - Part 2

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      By Andrew GoodaleInstitutional Portfolio Manager, Eaton Vance Management

      Boston - In the second of our two-part blog series, we continue our discussion of how the green bond market contrasts with the broad bond market. Specifically, we examine aspects of duration and risk in the industry-leading ICE BofAML Green Bond Index compared to the broad-based Bloomberg Barclays U.S. Aggregate Bond Index.

      Yawning duration gap

      Over the past few years, the makeup of green bond issuers has shifted from short-dated debt issued by supranationals to longer-dated sovereign and corporate bonds, dramatically increasing the average duration of the green bond market, while the average duration of the broad market has remained fairly constant. With duration being a key focus of fixed-income investors in 2019, the evolution of this index metric is worth monitoring.

      021220BlogDurationGap

      Risk and the European sovereign yield curve

      A significant contrast between green bonds and the broader market is revealed when comparing primary risk factors, estimated using a linear factor model.1 An investment-grade bond's return, and thus, its risk, is mostly about interest rates and curves - with credit spreads, liquidity and prepayments playing less prominent roles. After eliminating currency risk by employing the USD hedged version, it turns out that the majority of the ICE BofAML Green Bond Index's risk is driven by its exposure to a European (specifically German) sovereign yield curve, as illustrated in the chart below.

      You don't have to look very far to see how significant that impact can be. In 2019, yields on short-dated German bunds barely budged, while yields on US Treasurys fell dramatically. As issuance patterns change over time, these risks will also evolve, but this highlights why understanding the market is so important to investors.2

      021220BlogChart2

      Looking forward

      In 2019, we saw more governments issuing green bonds and anticipate this trend will continue in 2020. As issuance surges, we continue to be selective in evaluating the structure of green bonds and overall issuer profile across sectors, industries, and countries to identify the most attractive securities for our green bond strategies.

      Further, we see expanded opportunities for impact as companies from different economic sectors seek to issue debt that addresses environmental challenges beyond decarbonization and efficiency efforts, which traditionally have dominated the green bond market. We look for issuers whose strategic goals are aligned with the green debt they are issuing.

      Bottom line: Green bond issuance is surging as more investors seek alignment with climate-risk and other environmental solutions. Increasingly, this market represents a growing opportunity for financial advisors and institutional investors.