When the International Finance Corp priced a $2bn five year green bond last week at 1.7bp over Treasuries — the tightest spread ever for a dollar benchmark by a public sector issuer — its funding team was candid about what made the final basis points of tightening possible: a book stacked with dedicated green investors, happy to buy and hold.
With triple-A peers now issuing bonds at around 2bp over Treasuries, that extra push from green investors is no longer a rounding error. It is a material share of the entire credit spread, and one of the last pricing levers an issuer has left.
The reason is structural. Spreads stop tightening when the numbers stop working for bank treasuries, which weigh what a bond pays against what it costs to fund and hold.
Green investors are usually managing real money — they don't have to make a carry, but seek absolute yield. And many have specific mandates from their customers to make green investments. The book for a green bond can therefore hold together at spread levels where a conventional one would fall apart.
The same week supplied the contrast. KfW priced a $3bn three year note at 1.9bp over Treasuries. Once the spread was set, the book shrank more than a quarter, with bank treasuries trimming hardest. IFC went tighter, possibly through fair value. Its attrition after 4bp of tightening was almost as high, but the deal ended 2.9 times covered, versus 2.3 for KfW.
No two deals are perfectly comparable, and IFC's twice-a-year scarcity did some of the work. But the pattern exactly fits what the mechanics of green issuance imply.
What this also means is that the first supranational, sovereign or agency issue to enter the so far only imagined territory of pricing inside Treasuries could well be a green bond.
Green demand would be more likely to survive below limits conventional buyers would not cross.
Certainly, an SSA issuer wanting to cross that barrier would be wise to equip itself with a green label.
Yet no issuer is sprinting for that finish line. Squeeze out the last basis point of juice and the investors who bought are left with nothing. A frequent borrower needs them back for the next deal, so will not want to be too stingy.
GlobalCapital has already argued that pricing through Treasuries would be a warning, not a triumph — more an omen of US weakness than a feather in the cap of SSAs.
The issuers, judging by their restraint, seem quietly to agree.
Green finance set out to fund the low carbon transition. It would be a sweet irony if investors' determination to do that pushed the green sector's funding cost below that of the climate-sceptic Trump administration.