Declining Interest Rates Could Boost Green Bond Market

Amid high interest rates and criticism of ESG investing, some market participants may have taken their eyes off green bonds. An understandable move, but one that may not be rewarded.

After all, financing needs for renewable energy and infrastructure projects haven’t waned. If anything, those needs remain elevated, underscoring the potential viability of assets such as the VanEck Green Bond ETF (GRNB).

GRNB follows the S&P Green Bond U.S. Dollar Select Index and holds dollar-denominated green bonds. The exchange traded fund is higher by 1.54% over the past 90 days. A modest move to be sure, but one that could signal fixed income investors are renewing interest in this corner of the bond market.

Green Bond ETF GRNB Could Benefit From Lower Rates

GRNB, which turned seven years old earlier this month, like other bond ETFs, could be a play on declining interest rates in the U.S. – assuming that scenario arrives. However, it’s not mandatory. Consider the following: Global green bond issuance rose to $492.30 billion in 2023 from $446.18 billion in 2022, according to the Climate Bonds Initiative, despite rates being high around most of the world.

That’s a reminder that while the U.S. is the largest country weight in GRNB, the fund devotes just 37.74% of its weight to domestically issued green bonds, meaning the ETF isn’t overly dependent on the Federal Reserve to pare rates. Fortunately, inflation is cooling in other regions, which compeld other central banks to trim borrowing costs. It’s possible that if those moves arrive, GRNB could benefit.

“Inflationary pressures are abating in several large global economies, setting the stage for central banks to loosen monetary policy to support growth. The International Monetary Fund now expects the world economy to grow 3.1% in 2024, according to its January ‘World Economic Outlook’ report, from the 2.9% it predicted in October 2023,” noted S&P Global Market Intelligence.

European Green Debt Could Boost GRNB

GRNB’s significant exposure to European green debt could also be a catalyst for the ETF. Not only is the European Central Bank poised to lower rates at some point this year, regulators there are taking steps that could result in more green bond sales.

“New European Union standards for green bonds issuance — which take effect in January 2025 — will add additional support to the debt market, said analysts. The new norms aim to improve the transparency, comparability and credibility of the green bond market, helping investors assess the environmental, social and governance stance of issuers more closely,” added S&P Global Market Intelligence.

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