☀️☕️ Greenium Shrinkage

📊 Also: Chuck's vote, € Peaking Interest; Lulu strikes a Warrior Pose 🎓️ Bonds up, Interest rates down

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📝 Focus

• Greenium Shrinkage?

📊 In the Markets

• Chuck's vote, € Peaking Interest

• Lulu strikes a Warrior Pose

📖 MoneyFitt Explains

🎓️ Bonds up, Interest rates down

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📝 Focus

Greenium Shrinkage?

The “greenium” on green bonds has been shrinking over the last year as interest rates have risen sharply and investors demand higher yields, i.e. the interest rate you actually get at the bond price. The “greenium” is the difference between what a green bond yields compared to an otherwise similar conventional non-green bond. (The lower yield that investors are happy with to own greener debt translates into a higher price -or ‘premium’- that they are willing to pay for the bond🎓).

A recent study by economists at the Dutch bank ABN showed the greenium for corporate bonds traded in the secondary market has all but disappeared in the last half a year. But they also suggest it’s because markets have been rallying, and the greenium only increases when investors are in “risk-off” mode. (An IMF study, on the other hand, shows sovereign green bond greeniums to be very small but increasing over time, with a higher greenium in emerging markets.)

..... ▷ The first green bond was issued just before the Great Financial Crisis in 2007 by the European Investment Bank. It was then referred to as the ‘Climate Awareness Bonds’ (CABs), with proceeds from CABs meant for projects contributing to climate change mitigation. Whilst there are a few types of different green bonds, they primarily have the same goal of financing green projects of varying degrees. Many green bonds also come with incentives such as tax exemption and credits to attract more investors. As of January 2023, green bonds have raised $2.5 trillion globally, contributing towards green and sustainable projects. A notable example is the NextGenerationEU Green bond.

“There is no Planet B”… coined by Prof. Mike Berners-Lee, a leading expert on the environmental impact of the internet and the younger brother of Sir Tim Berners-Lee, the inventor of the World Wide Web
- Image credit: Li-An Lim via Unsplash

..... ▷ One of the most significant issues about green bonds is greenwashing. Greenwashing is providing false impressions, often to make a product sound more environmentally friendly than it actually is. According to the Hong Kong Monetary Authority, a third of corporate green bond issuers’ environmental performance deteriorates after the initial green bond issuance.

..... ▷ Over the years, many organisations and countries have stepped in to combat this issue with different frameworks and ‘rules’. For example, Singapore has its own green bond framework that is subjected to external review. This framework aligns with its national green goals as well as international guidelines and practices for green bond issuance. That said, these frameworks are all very much work-in-progress as loopholes can easily cause greenwashing to slip through the cracks of regulations. Many also criticise green bonds, claiming they do little to drive change in companies’ business models and environmental practices as the title is often just for show.

..... ▷ On a more macro level, certain shifts have also surfaced between countries. As the concept of green bonds started in Europe, it is currently the biggest borrower in green debt. However, that may change as China ramps up its green bond issues, and some expect Asia to issue green bonds at a faster rate than Europe. Regardless of region, the supply of green bonds will increase as governments continue promoting green bonds to advance their national climate goals.

Author: Alexis Kong, NUS Business School, 2024

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📊 In the Markets

Chuck's vote: With surprising ease, House Speaker Kevin McCarthy pushed through the bipartisan compromise bill to raise the debt ceiling, which is needed to avoid a historic default. It will then be sent to Democrat Chuck Schumer’s Senate, the final stage before it can be signed into law by President Biden, also a Democrat. Not a done deal, but a lot closer to averting the catastrophe awaiting us next Monday had extremists on both sides had their way, and that provided a tailwind for markets on Thursday.

- Image credit: Kelly Sikkema on Unsplash

..... ▷ Actually, markets had already moved on to getting bullish about a Fed pause at the June meeting on signs of easing wage pressure on inflation. Payroll processor ADP reported that wage inflation is slowing, while a Labor Department report said the price of labour based on one unit of output rose in the first quarter at a 4.2% annual rate, which was much slower than the 6.3% rate initially reported just last month. (Revisions are common.) Focus now shifts to today’s May non-farm payrolls report for overall employment/unemployment trends. A Dow Jones survey shows economists expect job growth in May of 190,000, a slowdown from the 253,000 added in April and the smallest gain since December 2020.

Peaking Interest: In Europe, traders were also bullish, but on the prospect that the European Central Bank would only hike rates by 0.25% when it meets on June 15th, which could possibly mark the peak of interest rates in the eurozone. The central bank embarked on its current hiking path in July 2022 (four months after the US belatedly started its own hiking cycle) when it brought its main rate from -0.5% to zero. After 6 further hikes, the main policy rate now stands at 3.25%.

€ interest rates in June/July to peak or plateau?
- Image credit: Jean-Daniel Calame via Unsplash

..... ▷ Official data showed eurozone-wide inflation slowing down more than expected, falling in May to an annual rate of 6.1%, the lowest rate since Russia’s invasion of Ukraine. Core inflation, which excludes energy and food prices, fell encouragingly to 5.3% from 5.6% in April, though it’s still well above the 2% target.

Lulu strikes a Warrior Pose

Yogawear retailer Lululemon Athletica was a big pandemic lockdown winner, and its shares (LULU) almost trebled from its 2020 lows to its 2021 highs. On Thursday, it reported earnings and provided full-year guidance that crushed the best guesses of Wall Street’s Highly-Paid Finest on huge gains in China and benefited from lower freight costs. Shares in the 25-year-old company surged over 13% in after-market trading, pushing its market value (share price X number of shares) up to $47bn, making it more than 50% bigger than 74-year old Adidas (though still under a third of Nike’s market value.)

- Image credit: Tenor

..... ▷ The Vancouver-based company saw revenues shoot up 24% to $2bn, driven by a 79% surge in sales in China from the previous year when the country was still under zero-Covid restrictions and about a third of its 71 stores nationwide were closed. Earnings per share (EPS) came in at $2.28 vs $1.98 expected for the quarter.

..... ▷ Like most brands, Lululemon does not make its own clothes. It outsources its manufacturing to a network of over 60 suppliers in 17 countries, including Bangladesh, Sri Lanka, Cambodia and Vietnam. Because of its premium pricing, it is able to put sustainability initiatives in place, including reducing water usage and using recycled materials (including its signature fabric, Luon.) It also aims to work with ethical suppliers, though it’s had some high-profile issues in the recent past with the labour practices of its suppliers in China and Bangladesh regarding pay and safety.

“…young female workers at a factory in Bangladesh making clothing for the label gave detailed accounts of how they struggled to survive on meagre wages and faced physical violence and regular humiliation at the hands of their managers, who called them ‘whores’ and ‘sluts’…”

 Guardian investigation, 2019

..... ▷ Current CEO Calvin McDonald has said that he wants Lululemon to be "the most inclusive company in the world". Progress from back in 2013, when founder Chip Wilson was forced to resign as chairman having sparked a public backlash after saying the stretchy leggings were not made for women “without a thigh gap,” and that “Frankly some women’s bodies just don’t actually work for [the pants].”

📖 MoneyFitt Explains

🎓️ Bond prices go in the opposite direction to interest rates (yields)

• When you lend somebody money, you expect some kind of compensation for it, usually in the form of interest, reflecting

• (a) what you could get if you had done something else with it, like lending to somebody else, shoving it in a bank or investing, and

• (b) the likelihood of getting your money back at all at the end of the arranged loan period.

• Well, a bond is the same thing - when a company or a government wants to borrow some money other than from a bank, they issue bonds.

• Bonds come with a "coupon", a promise to pay a certain amount of money to the bondholder on a regular basis for the life of the bond (known as “maturity”), including to any new owners of that bond.

• Bonds are usually issued at 100% of the face value (the amount borrowed), so the interest rate you get if you buy it at issue is pretty simple! The main thing to remember is whatever the price of the bond, the coupon remains the same.

• So if the bond price goes up, the yield, the interest rate you actually get at the new price, will be lower since it's the same size coupon divided by a larger number (yield = coupon/price.) If the bond price goes down, the yield will go up (same coupon divided by a smaller number.

• If something happens to change how buyers feel about (a) and/or (b) above, then the price they will pay for the bond will change... and so will the yield.

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