Labelled bonds and relative liquidity
The flip side of additional demand for labelled bonds is that they can end up being tightly held, with consequent lack of secondary liquidity. Investors are less concerned about trading activity than they are with being confident that they can sell when they need to, however – and labelled bonds score on this front.
CHRYSTAL Liquidity concern is rarely about buying bonds – it is about the ability to sell them when needed. We have noticed a bit more oversubscription for corporate GSS bonds, though our view is that this is mainly due to the scarcity effect: investors that have to buy them might put in an oversized bid because these deals don’t come about very often.
Investors that don’t have to buy also know that there tends to be more oversubscription so higher chances of secondary performance, so they also participate. Our experience has been that, outside of a bit of primary technical activity, GSS bonds pretty much trade like vanilla bonds in secondary as investors that are not required to buy can still buy them.
KELLY My observation is that labelled issuance tends to be very tightly held. ESG [environmental, social and governance] investors usually put it in a draw and wait until it matures. There is definite demand for labelled issuance because there is a wider investor base, but secondary supply can be very thin compared with generic issuance. This gets worse moving from high-grade issuers down to credit.
SSA [supranational, sovereign and agency] and semi-government bonds are occasionally seen on a dealer axe but are not widely traded. From a secondary market perspective, this can mean there is stale pricing for labelled issuance and, as a manager that can invest in both, we are always trying to refer to the curve and ask if we are paying a penalty for buying green.
“Our experience has been that, outside of a bit of primary technical activity, GSS bonds pretty much trade like vanilla bonds in secondary as investors that are not required to buy can still buy them.”
VAN KLAVEREN This is something that has changed as the market has evolved. In the early stages, small deals were tightly held and while we could always get a bid for a bond it was difficult to buy the bond as there were no sellers. It was only the primary market in which we could get exposure.
Nowadays, there is more issuance, broader issuance and bigger lines. There is more liquidity and two-way price action. The older, smaller lines are still buy-and-hold and illiquid – that is, they are illiquid from a buyer side, not a selling side. As an investor, the smaller bonds are illiquid because they are impossible to buy. Whereas there is more two-way price action for the larger lines of securities issued.
BISHAY If an issuer has GSS and vanilla bonds, I don’t think GSS issuance dilutes liquidity in the vanilla bond. It is irrelevant. In corporate credit – outside of supranationals and semi-governments – the concept of additional size creating liquidity is partly the case, but it does not mean an issuer’s sustainable bond will make its vanilla bonds less liquid.
Credit markets tend to operate in one direction: either everyone is buying or everyone is selling. Corporate credit is often hard to access in the secondary market and it is important to think about it from this perspective. In the semi-government space, all things being equal, for the same issuer an ESG-labelled bond should be in high demand, assuming it is what the market classes as a good-quality ESG issuer and the projects are reasonable.
