Fixed income outlook 2021: An expanding green market

2021 forecasts for green bonds, insurance and interest rates

Fund managers and CEOs share their outlooks for different themes aimed at supporting the planet and society

Green bonds

David Zahn, head of European fixed income, Franklin Templeton Fixed Income

David Zahn

Since taking over the presidency of the European Central Bank (ECB), Christine Lagarde has consistently pushed for environmental issues to be an essential part of monetary policymaking, with climate change a “mission-critical” priority for the central bank. Given her commitment to this agenda, the ECB will remain a willing buyer of green bonds into this year and beyond.

The European Commission (EC) has also made a pledge to decarbonise the economy, with a vision of net-zero greenhouse gas emissions by 2050. In her State of the Union speech earlier this year, EC President Ursula von der Leyen proposed an even more ambitious target of achieving a 55% reduction in emissions by 2030 and suggested that €225bn of green bonds should be issued to aid climate-friendly initiatives. If agreed by member states, this would consolidate Europe’s position as the leading issuer of green bonds.

Given these tailwinds, there is the expectation of further expansion of the green bond market in 2021. Germany has already issued a 10-year green sovereign bond that met with record demand. It intends to create a green bond yield curve by issuing green sovereign bonds in the additional maturities (i.e., two, five and 30 years) of a conventional yield curve, which is an important step. The creation of a benchmark curve for the asset class would allow investors to trade these bonds more freely and help the green bond market to expand.

Kris Atkinson, portfolio manager, Fidelity Funds – Sustainable Reduced Carbon Bond Fund

Kris Atkinson

We expect to see continued new issuance of green, social and other sustainability-linked bonds and we welcome new issuers, such as the UK where the Chancellor announced the intention for the UK to issue a green sovereign bond.

See also: – Industry welcomes Chancellor’s UK green bond and mandatory TCFD

The market is still small and less liquid compared to the broader bond market, and we often see bonds trading at a premium for being green (“greenium”).

Hopefully as new issuance develops in this market we hope to see the creation of a green bond “curve” and the convergence of pricing between green and brown bonds from the same issuer.

Insurance and banks

Aitken Ross, co-manager, Liontrust Sustainable Investment Fixed Income Team

Aitken Ross

From a sector perspective, we continue to favour areas including insurance and banks, both of which offer increasingly strong sustainable credentials as well as attractive fundamentals and valuations.

With insurance for example, these companies provide a number of benefits to society, giving an economic safety net to millions, facilitating economic development and growth, and also researching and furthering our knowledge of sustainability and key environmental and social issues.

Noelle Cazalis, manager, Rathbone Ethical Bond Fund

Noelle Cazalis

Continued stimulus from central banks, and positive news of vaccines should give a strong backdrop for investment grade credit. Higher growth projections will lead to a rebound in earnings and improving credit fundamentals in 2021.

Although valuations are not as attractive as they were a few months ago, some sectors still offer relative value in our view. We particularly like subordinated insurance bonds.

Interest rates

2020 was marked by extraordinary fiscal and central bank stimulus. Central banks’ support is here to stay and rates are likely to remain low for the years to come.

We will watch closely the Bank of England’s rate decisions in 2021. The Bank is likely to push back a move to negative interest rates for as long as possible. The effectiveness of negative rates is still contested within the monetary policy committee, and as the UK economy is geared to the financial sector, it adds another level of sensitivity.


Natasha Turner

Natasha was global editor at ESG Clarity, part of Mark Allen Financial, and a financial journalist for seven years. She has been shortlisted for Story of the Year and Investment Journalist of the Year...