The municipal bond market remained strong on Wednesday in pre-holiday trading with bond prices rising during the half-session ahead of New Year's Day. Traders said tax-exempt yields were lower by about two basis points.
Elsewhere, much debate is swirling around Green Bonds for 2015 and whether they are truly the wave of the future or just a new way to market an old asset class.
THE COLOR OF MONEY
Green bonds are bonds whose proceeds are specifically earmarked for environmental, climate, or other eco-friendly sustainable purposes.
Several noteworthy Green Bond issues hit the market in 2014. These included the Metropolitan Water Reclamation District of Greater Chicago's $300 million deal, the University of Cincinnati's $30 million sale, the Indiana University's $56 million offering, Connecticut's $21 million sale and the Utah Associated Municipal Power Systems' $21 million deal.
And The Bond Buyer's Deal of the Year Award for the Northeast region went to the District of Columbia Water & Sewer Authority's $350 million century-bond offering, the first independently certified green bonds sold in the United States.
In October, the Bank of America Merrill Lynch Global Research announced the launch of its global Green Bond Index, designed to track the performance of the debt that is issued worldwide.
"The first Green Bond was issued in 2007, but through 2012, additional issuance was slow," Phil Galdi, head of BofA Merrill Lynch Global Bond Index Research, said at the time. "However, in 2013 more Green Bonds were issued than in the previous six years combined, and that volume has already more than doubled in 2014. Currently, there are $31 billion in qualifying Green Bonds included in the index, but that may just be the tip of the iceberg."
"It is estimated that the world needs up to $53 trillion in energy investments by 2035, including $39 trillion to shift away from fossil fuels and $14 trillion for energy efficiency, according to BofA Merrill Lynch strategist Beijia Ma. "We believe Green Bonds are a game-changer in unlocking private capital to meet that funding requirement."
U.S. issuers have also been giving the perceived demand for Green Bonds a second look.
"We were really taking our cues that this is something that investors were looking for; investors that are trying to target their dollars towards more socially responsible projects," according to Don Lukes, Associate Vice President and Associate Treasurer at Indiana University. "It's a way to potentially reap new investors and get our story out there."
And other issuers feel the same way.
"The Green Bonds will support projects that reduce our carbon footprint and improve energy efficiency," said Metropolitan Water Reclamation District of Greater Chicago Commissioner Mariyana Spyropoulos. "The Green Bonds are a wonderful offering for financial institutions and individuals who want to invest in environmentally beneficial opportunities."
Some issuers see definite benefits to issuing bonds bearing the Green label.
"We developed the new Green Bond product to meet the needs of the growing group of investors who have mandates and goals to invest in responsible green infrastructure projects. This initiative clearly was a success," said Connecticut's Treasurer Denise Nappier.
And some concur in seeing the Green stamp's value.
Alan Westenskow, vice president for UAMPS' financial advisor Zions Bank Public Finance, said the Green Bond designation is good from a marketing perspective because it may catch the attention of investors who might not otherwise participate in the municipal market.
But some have questioned the nature and worth of the Green Bond designation.
"Municipal bonds provide state and local governmental entities with the intent of offering a public benefit through access to U.S. capital markets," according to Jim Colby, chief municipal strategist at Van Eck Global. "These benefits accrue to delivering potable and clean water, sanitation, power (electricity), transportation, pollution control, education, housing, and health care, to name a few. So what could be more socially responsible and 'Green' than the municipal asset class?"
Colby questions whether there are any tangible financial benefits to the transactions.
"I believe that investors, already familiar with the benefits of muni investing, applaud such a noble assertion," Colby says. "As far as I can tell, however, there are virtually no incremental benefits for the investor or issuer, save for the psychological effect that those baby boomers or even the millennials may derive as they collect their coupons."
Meanwhile, some firms have set up specific funds that appeal to those socially conscious investors.
"We buy Green Bonds for some of our portfolios, due to some of the funds' requirements," said Dawn Mangerson, managing director at McDonnell Investment Management. "But we have seen Green Bonds pricing at the same levels as other bonds. There was not a lot of difference."
Indiana University's Lukes tended to agree, saying the finance team didn't expect to see any significant savings coming from the Green Bond marketing.
"Since Green Bonds officially debuted in the U.S. municipal bond market in June 2013, roughly $1.6 billion of green bonds are scheduled to, or have been issued," Bank of America Merrill Lynch said in a November report.
Colby said that while still a new market, the use of Green Bonds for municipal issuers could be endless.
"All of this leads me to wonder whether the industry hasn't wasted some time and money to touch up an asset class with a new coat of paint though fundamentals remain otherwise unchanged. It seems to me the chosen paint color is green," he said.
Justin Land, Director of Tax-Exempt Management at Wasmer, Schroeder says his firm launched a positive impact fund about two years ago and that it has been doing well.
"Green is just putting a specific label on it," Land said. "Municipalities have done projects with a positive impact for years, whether Green or otherwise."
He added that Green bonds are becoming popular with the bigger issuers, but that this may be changing.
"Many bonds are already Green - but they're just not labeled that way," he said, adding "We are looking to see small issuers go the Green route and this will have a positive social impact."
THE WEEK AHEAD
No bond or note deals are scheduled for sale until after the start of the New Year, with both the negotiated and competitive calendars devoid of any issues until January.
SECONDARY MARKET
High-grade municipal bond prices closed out the year on a strong note. The yield on the benchmark 10-year general obligation dropped two basis points to 2.04% on Wednesday from 2.06% on Tuesday, while the yield on 30-year GOs declined two basis points to 2.86% from to 2.88%, according to the final read of MMD's triple-A scale. On Dec. 31, 2013, the 10-year GO stood at 2.77% while the 30-year GO stood at 4.19%, according to the historical MMD read.
Treasury prices moved higher, with the two-year note yield falling to 0.67% on Wednesday from 0.69% on Tuesday. The 10-year yield decreased to 2.18% from 2.19% while the 30-year dropped to 2.74% from 2.76% on Tuesday.
On Wednesday, the 10-year muni to Treasury ratio was at 93.6% versus 94.1% on Tuesday, while the 30-year muni to Treasury ratio was at 103.6% compared to 104.3% on Tuesday.
