By Shelburne, Vermont Financial Advisor Josh Kruk
May 13, 2021
Because it apparently doesn’t have enough money yet, on May 10th Amazon raised $18.5 billion in a sale of new bonds. Stated differently, Amazon just borrowed an amount that represents more than 50% of the Gross Domestic Product of the entire State of Vermont1.
As a testament to Amazon’s strength in the eyes of the market, the bonds were issued at very low yields and were still met with plenty of interest from buyers. For example, their new 2-year bond yields only 0.1% more than a 2-year U.S. Treasury note2 (we know what some of you are thinking…at the pace the government is issuing debt, maybe Amazon’s borrowing costs should actually be lower than the government’s).
Of interest to us was the fact that $1 billion3 of the new bonds were specifically designated as “sustainability bonds” whose proceeds will be earmarked for low-carbon projects. As more companies commit to net zero emissions, we expect issuance of this type of green debt to increase exponentially.
It’s a good thing, because it is estimated that annual low-carbon investment will need to total at least $1 to $2 trillion4 annually to reach net zero emissions globally by 2050, a milestone that aligns with the Paris Agreement. Certainly, some of that will come from governments, but the private sector will also need to significantly step up its involvement.
The low yield on the Amazon bond issue highlights a current challenge for investors like us when it comes to green bonds. Much of the supply so far has come from foreign government or quasi-government entities (e.g., development banks). The risk of default for those issuers is very low, but so is the available yield. For example, the 30-day SEC yield on the iShares Global Green Bond ETF was 0.46%5 as of May 10th for a portfolio with an average maturity of about nine years. As much as we’d like to recommend green bonds for our impact-oriented investors, it’s difficult to make the investment case when yields on many bonds are below those available on Treasury securities.
Our hope (and expectation) is that green bond issuance will expand in the U.S. and will include a wider variety of private sector companies. This should improve the return profile, and we have little doubt there will be widespread demand for the bonds. We’ll keep you posted on this market as it continues to develop.
On the subject of investor demand, the first quarter of 2021 set yet another record for asset flows into sustainable investment funds. Per Morningstar6, the global sustainable fund universe attracted $185 billion in the first quarter, up $27 billion from the prior quarter. As with most things climate-related, Europe is WAY ahead of the rest of the world, accounting for about 80% of the invested assets.
“Truth is, Bezos didn’t really need the support yacht, but Amazon did one of those upsells where they go ‘People who buy this, also buy this.’” – James Corden, describing Jeff Bezos’ purchase of a $500 million yacht that is so large it needs its own smaller support yacht.
Notes
1. U.S. Bureau of Economic Analysis, Federal Reserve Bank of St. Louis.