Germany started the sale of its first ever green bond on Wednesday, hoping to raise at least 4 billion euros. Eyes are on the bond’s unique structure. Germany, the euro zone’s benchmark issuer, is selling it as a twin of its outstanding Aug 2030 bond.
Every time it sells a green bond, Germany will increase the size of that bond’s otherwise identical, conventional twin on its own books. Investors will be able to exchange the two, which should mitigate liquidity worries.
Investors are closely watching how the yield on the green bond will compare to its conventional twin. Lead managers set price guidance in line with the twin.
“The positive thing on this twin bond structure is that… we will have a green bond curve for sovereigns. That’s not the case for the sovereigns we have,” said Arnaud-Guilhem Lamy, a portfolio manager at BNP Paribas Asset Management.
Rather than issuing one green bond and upsizing it like France and the Netherlands, Germany hopes to eventually build a euro zone green yield curve. Enthusiasts hope that will help lure more issuers into the market.
“It’s interesting to be able to have shorter green bonds in the portfolio,” Lamy said.
In addition to the green bond, Germany is also scheduled to raise 4 billion euros via an auction of five year bonds. German yields dipped ahead of the expected deal, with the benchmark 10-year yield down 2 basis points to -0.44%, its lowest in nearly a week.
Greece is also in the market, re-opening a 10-year bond via a syndicate of banks. Focus was also on inflation expectations, which took a hit in late Tuesday trade following a sell-off in long-dated bonds in the U.S., after reacting little to a negative inflation reading in the single currency bloc.
A market gauge of long term expectations fell to its lowest in over a week at around 1.23% EUIL5YF5Y=R.
Yield curves in both the U.S. and Europe steepened last week after the Fed announced it would target average inflation. Some analysts say it is too early to price in a rise in inflation, but the kick-off in issuance might help keep curves steep.
“A steepening theme could persist now that we have left the calmer waters of summer and see the first supply waves rolling in,” ING analysts told clients.
The bank expects some 110 billion euros of issuance by euro zone governments in September, compared to 77 billion euros during August’s summer lull, although it estimates that much of that will be absorbed by redemptions.
Source Nasdaq