Last year, $60bn of sustainability linked bonds (SLBs) were issued worldwide, a 37% decline on 2021. Issuance has fallen amid ‘greenwashing’ concerns. Interest rate increases, if a company does not meet its targets, are low. Unlike green bonds used to finance specific projects, SLBs have not benefited from greenium (a lower borrowing cost).

Although central bank interest rates have been rising, Spanish banks have kept interest rates on term deposits on 0.4%. So when the word got out that 3% can be earned on 12-month treasury bills, demand soared. Online purchases reached €400 million in January, as much as the total for 2022, and pensioners queue in front of the Bank of Spain.

Global sales of ethical debt are set to suffer their first drop this year. The market went from “greenium” to underperforming conventional debt. ESG deals that took weeks to structure in 2021, now take months, and money managers take longer to vet the bonds. Europe is expected to lead the sector, but the EU has failed to reach a deal to fight greenwashing.

This year’s devastating losses for bond holders may continue in 2023. Interest rates will rise further and the ECB will shrink its vast crisis-era debt holdings just as governments ramp up issuance. Germany’s 2-year note touched 2.50%, its highest since 2008. The spread between German and US 10-year yields has narrowed the most since March 2020.

The ECB plans to shrink its €5tn bond portfolio by about €300bn, while eurozone governments are expected to increase the amount of debt they issue from €1.1tn this year to about €1.3tn next year. Increased debt issuance, coupled with less bond buying from the central bank, could revive concerns over a repeat of the region’s 2012 sovereign debt crisis.

Europe’s markets watchdog ESMA has proposed new standards for ESG labelling. Many funds have already been downgraded from Article 9, EU’s top ESG class, to Article 8, after the EU clarified its rules. But only 18% of Article 8 funds, which hold about $4 trillion of asset, meet the new standards and managers won't be able to label them sustainable.

EU ministers have backed a carve-out for banks and investment funds from a landmark regulation. The corporate sustainability due diligence directive requires companies with more than 500 employees or €150mn global turnover to identify and prevent activities such as child labour, worker exploitation or damage to natural ecosystems in their supply chains.

The European Investment Bank launched Project Venus and issued a €100 million digital bond. Central banks of France and Luxembourg provided a digital representation of the euro in a form of tokens. Société Générale and Goldman Sachs acted as on-chain custodians. The bond will be listed on the Luxembourg Stock Exchange.

It is a $2 billion unregulated global market. A major reseller of carbon offsets, EKI went from $10 M to $1 B valuation in a year. 95% of the offsets it sells are tied to wind and solar projects, which are profitable even without them. Many “offset-verifying” companies have stopped approving such offsets, but new companies that “verify” them sprung up.

UK’s DB schemes collectively have £1.5tn assets under management. They will invest more in liquid markets like bonds and gilts. Conversations with investors are around high inflation, more volatility and rising interest rates. Instead of thinking in terms of equities and fixed income, investors are thinking about “risk factors” that cut across asset classes.

HSBC announced plans to launch Orion, its DLT platform for issuing bonds. It enables the tokenisation of both the digital bond and the currency used for settlement, enabling atomic settlement or delivery versus payment (DvP). Tokenisation opens up opportunities for fixed-income issuance, including faster processing and improved operational performance.

The price investors pay to borrow cash overnight by pledging gilts is trading 43 basis points below the BOE’s rate. Low repo rates are due to pension funds hoarding cash and years of quantitative-easing have limited the pool of safe government securities freely available to trade. Demand for high-quality liquid assets still outstrips supply.