Convertible bonds, which offer investors the chance to convert to equity when the stock reaches a certain price, give companies the chance to raise money without facing double-digit interest costs.

Research from Man Institute released in March this year reveals issuance activity started to pick up towards the end of the 2022 just when interest rates were at their highest. Thirty per cent of the entire year’s convertible bond volume came in the last two months.

And issuance continues apace this year as interest rate continue to climb. In the first quarter of 2023 US utility companies PPL Corp and Southern Co became the first two in their sector to use convertible bonds in 20 years, raising a total of USD2.4 billion between them. 

Tracy Maitland, President and Chief Investment Officer at convertible bond manager Advent Capital Management, says: “We have come to the end of decades of what amounted to free money through low or even negative interest rates. That’s clearly not the case anymore.”

At the same time, severe market volatility also plays to the convertible bond market since when a stock is unpredictable the option to convert a bond to equity when it reaches a requisite point becomes more valuable. For equity investors especially, this is notable as they capture the upside, but minimise the downside. For example in 2022, convertibles only captured 52 per cent of equities’ negative return. 

Meanwhile, rates look attractive for convertible bond issuers.  According to Barclays research, a firm considering issuing a straight bond yielding 6 per cent could alternatively issue a five-year convertible bond at 1.67 per cent, saving 433 basis points on the coupon size. 

Man Institute says that investment-grade issuers, who have pulled back from the convertible space in recent years, might also return to the market as rates remain elevated.

Maitland says: “It’s a win-win situation because the issuer is saving money and they also have a defensive equity strategy.”

Despite the uptick in issuance and in investor interest, Maitland concedes the convertible bond space is largely undiscovered.

“It’s not omnipresent, but that’s both good and bad. On the good side it’s not an overcrowded space, and there is positive asymmetry which is the ability to capture a majority of the upside, while only be subject to a portion of downside risk. On the downside, convertible bonds are a unique asset class that most people just do not know about.”

While Maitland says he wants to keep the convertible bond club exclusive, he would like to see more investors allocate to the asset class, particularly as a means of managing capital reserve requirements.

“If US insurance companies invest in stocks, they have to prove a reserve of 30 cents on the dollar, but if they buy investment grade convertible bonds, it is one to three cents on the dollar. Convertible bonds are the most capital efficient investment that they can make, but a lot of [investors] don’t know that.”

Of course, this should be of little surprise when considering the immediate aftermath of the crash in 2008 saw real government bond yields (the yield received when subtracting the impact of inflation), turned negative for the first time as central banks flooded the market with liquidity. 

What really put the nail in the coffin though, was that this market abnormality not only persisted, but worsened. With governments later issuing new bonds which guaranteed that an investor would lose money, even before accounting for the effects of inflation. 

That is, an investor was paying to lend. Good luck trying to explain that to your grandchildren.

Fast forward a decade, and rising prices across the globe have forced central banks to engineer the most aggressive rate hiking cycle most of us have seen in our working lives.

Government bond yields have surged higher, and bond prices plummeted, the latter doing little to get bonds back into investors’ “good books”.

This price movement, however, is to be expected. If we look back to the rate hiking cycles that have occurred over the last 30 years, the average return for the 10 year US Treasury index is -2.6 per cent. 

Furthermore, broadening the analysis to include the three months prior to lift off (accounting for the fact that markets typically price in rate hikes before they actually happen) the average return is even more negative at -5.2 per cent.

But before you write them off completely, better fortunes may lay ahead for sovereign debt as we converge onto the Fed’s pivot point. Particularly when considering bonds have been 12 per cent better off on average, in the year following the peak of a hiking cycle.

The issue facing government bonds right now though, is inflation. It is hard to convey the level of antipathy bond investors hold towards a general increase in the price level. But rest assured, it’s high.

The fixed nature of the interest and principle paid to a bond investor fails to adjust for unexpected changes in inflation, and therefore the value of these payments are directly eroded as the general price level increases. 

Fortunately, there is a solution, as inflation-linked government bonds can more than make up for this fallibility.  

After all, their safe haven status mean that they offer everything a typical bond does in terms of diversification, whilst ensuring returns are real, not nominal, by adjusting coupon and principle payments by a standard measure of inflation, such as CPI.

But then why in a year dominated by inflation, have index-linked bonds fallen just as much as their nominal cousin?

Put simply, the ideal environment for index-linkers is one where inflation is running hotter than expected, whilst interest rates are being held constant (or indeed falling). This year has of course seen inflation shoot upwards, but so too have interest rates, the net result being poor performance overall.

You would be right to wonder if the aforementioned “ideal” environment exists. After all economics 101 tells us that central banks dislike inflation just as much as bond investors, meaning inflationary pressures are often met by interest rate increases.

There are however scenarios where this relationship does not hold. One centres around misjudgement, where central banks fail to appreciate the persistence of inflation, refrain from raising the base rate and commit policy error. Think back to the end of 2021, does the word “transitory” ring a bell?

Another is more closely related to inaction out of necessity. An example being when economies are moving through a period of stagnant growth and higher-than-expected inflation (un-affectionately known as stagflation), and central banks are forced to hold rates steady out of fear of choking already lacklustre demand.

It is not inconceivable, that the second of these scenarios is on the horizon. 

Looking back across 37 developed and emerging market countries over the last 70 years, we can see that when inflation hits the 8 per cent mark it typically remains at quite high levels.

It is also widely accepted that global economies are slowing. The UK and Europe are, for all intents and purposes, in a recession right now and the US may not be far behind. 

The reasonably precarious position many nations currently find themselves, means that any further negative shock could easily push them into a stagflation scenario.

In such an environment, inflation-linked bonds would be very much in vogue. 

Their safe haven status would match that of a traditional government bond, whilst their inflation linkage would ensure that they ultimately come out on top. 

If, however, inflation does come down quicker than history suggests, and instead tracks Bloomberg market estimates. Then traditional governments would also generate attractive returns, especially in a slower growth environment. 

So despite many “falling out” with bonds over recent years, it may well be time to welcome them back in from the wilderness.

Since those that don’t, may be left wanting.

The Fund is an Article 8 fund which aims to maximise returns within the high yield universe by conviction-based investing in sustainable companies from around the world.

The Fund is co-managed by Lila Fekih and Mark Remington, part of New Capital’s 10-person strong fixed income team. The team’s underlying investment philosophy is based on the belief that companies exhibiting good performance on material ESG issues are more likely, in their opinion, to be more resilient during challenging economic conditions.

The team defines a sustainable company as one which manages its ESG (environmental, social and governance) risks effectively to protect or enhance its financial profile. It may not have addressed all challenges, but the trajectory should be a positive one.

The team utilise two proprietary valuation models, which assess the price of a bond and probability of default. Hard screens are applied followed by in-depth analysis assessing a company’s vulnerability to ESG risks, financial implications of such risk, and crucially, a company’s strategy to address such risks and capitalise on opportunities generated. This analysis, which includes assessing the effectiveness of the management’s (or management team’s) sustainability strategy and the execution risks involved, is aimed at understanding the current risks but also how the future ESG trajectory impacts credit worthiness.

In addition to the wider fixed income team, Lila and Mark are further supported by the in- house specialist ESG team that provides key systematic and qualitative inputs to the investment process. The co-managers also work closely with dedicated macroeconomic research colleagues to ensure the portfolio is positioned accordingly for the prevailing economic environment.

Lila Fekih, Co-Portfolio Manager of the New Capital Sustainable World High Yield Bond Fund, says: “By investing in a portfolio of sustainable companies, we aim to reduce the number of potential defaults and maximize total return. We believe that companies that manage their ESG risks effectively will be able to reduce their financial risks.”

Moz Afzal, Global Chief Investment Officer, EFGAM, says: “Increasing regulation and policies aimed at tackling climate change, decarbonisation and energy transition, coupled with technological innovation enabling companies to be more sustainable, is driving the flow of capital. Heightened social awareness and demand for responsible and sustainable business practices are further fuelling client demand. Ultimately this weight of capital means that sustainable investments will enjoy better access to funding and a lower cost of capital, impacting the financial health of a company.”

Cboe Fixed Income is planned for launch in the second quarter of 2022, subject to regulatory approvals.
 
The new trading platform is designed to better enable dealers in US Treasuries to efficiently source liquidity and trade in size, while reducing market impact. This new platform will leverage the expertise and proven track record of Cboe FX, a global leader in electronic trading for 20 years with a reputation for world-class technology, cutting-edge liquidity solutions, product innovation and trading reliability and efficiency.
 
“We are excited to bring the best of what we do in the global FX market to the US Treasuries space,” says Jonathan Weinberg, Senior Vice President and Head of FX and US Treasuries at Cboe Global Markets. “Cboe Fixed Income is designed to address some of the biggest challenges that dealers face today, including flow segmentation, information leakage and high hedging costs. We believe the new trading platform will provide a unique solution that enables liquidity providers to interact directly with high-quality order flow, reduce market impact and receive opportunities for price improvement.”
 
Cboe Fixed Income will bring Cboe’s Full Amount technology – which enables large order risk transfer with low impact – together with its liquidity curation and analytics capabilities to further enhance trading in US Treasuries. The powerful combination of these capabilities is expected to create a high-value offering that differs from other interdealer trading models in the marketplace.  

Through the Full Amount matching protocol, liquidity consumers will be able to transact against the best quote from a single liquidity provider, while satisfying the full amount of the order to help minimise information leakage and slippage. Trades also will print in single executions, reducing ticket costs.

In addition, Cboe Fixed Income will provide customised liquidity curation services to help participants effectively manage liquidity segmentation. Cboe expects to actively engage with customers to analyse flows, provide valuable insights to make better-informed trading decisions, and continuously optimise the trading experience for liquidity consumers and providers. 
 
“With our footprint covering the world’s largest and most liquid marketplaces, we are excited to enter the US Treasuries market and further broaden Cboe’s market operations on a global scale,” says Ed Tilly, Chairman, President and Chief Executive Officer of Cboe Global Markets. “Fixed Income represents an untapped market for Cboe with many exciting product possibilities, and we look forward to extending our innovative technology and trading solutions to this asset class to serve an even broader base of market participants.”

The appointment to run the GBP604 million fund from 3 November, 2021 follows a detailed selection process and is part of Omnis’ ongoing monitoring and governance of its range of funds. Omnis’ role as the Authorised Corporate Director enables it to appoint new managers on its funds when it believes it is in the best interest of investors, and can do so without advisers or their clients needing to take any action.
 
Western Asset Management, a specialist investment manager of Franklin Templeton, has a long history of actively managing global bond portfolios for clients across the globe. Their investment philosophy focuses on long-term fundamental value investing, using a broad range of diversified strategies. This approach has been tested across various economic and credit cycles and has delivered strong risk-adjusted returns.
 
The Omnis Global Bond Fund will be supported by a deep bench of investment professionals, including Gordon Brown, Co-Head of Global Portfolios and Richard Booth, Portfolio Manager. The team is fully integrated within and supported by Western Asset Management’s broader investment team, which comprises 132 investment professionals across seven investment offices and five continents. This gives them a unique perspective in managing global aggregate portfolios—with strength and depth across all major fixed-income investment markets—and avoids any bias towards one market or another.
 
Robert Jeffree, Chief Investment Officer of Omnis, says: “Western Asset Management are fixed-income specialists with a very strong track record and a long history of investing in global fixed-income markets. ”
 
“We are excited to be working with a new investment manager and are confident Western Asset Management will deliver value for advisers and their clients invested in the Omnis Global Bond Fund.”
 
Gordon Brown, Co-Head of Global Portfolios, Western Asset Management, says: “We are delighted to partner with Omnis to manage the Global Bond Fund. Managing funds customised to our clients’ specific requirements such as the Omnis Global Bond Fund is one of our greatest strengths. Using our collaborative approach, we believe we offer a significant competitive advantage, building deep and long-lasting relationships and striving to exceed each client’s needs, expectations and objectives. We look forward to our partnership with Omnis and their investors over the coming years.”
 
Omnis Investments Limited is wholly owned by Openwork Holdings Limited. The Openwork Partnership has more than 4,300 financial advisers across the UK and operates as a directly authorised, multi-panel distribution network.

A total of 353 respondents took part drawn from following categories: corporates, asset owners, asset and investment managers, development banks, regulators, ratings and verification service providers.

In a range from 2022 to 2025, Quarter 4 of 2022 was selected by the largest group of respondents (25 per cent) as the quarter when green bond investment would pass USD1trillion for the first time in a single year. Quarter 4 of 2023 (13 per cent), Quarter 2 of 2023 (12 per cent) and Quarter 3 of 2023 (10 per cent) were the next most popular responses.

Sean Kidney, CEO, Climate Bonds Initiative, says: “The long-awaited USD1trillion milestone is now a market reality, whether at the end of 2022 or in 2023. But the climate crisis grows. It’s time to lift our sights and aim higher. USD5 trillion in annual green investment by 2025 must be the new mark for policy makers and global finance to achieve.

“Capital allocation towards clean energy, resilient infrastructure, green transport, buildings and sustainable agriculture needs to accelerate into the multiple trillions, every year, rippling through both developed and emerging economies.

“The climate capital gap still remains. USD5trillion in annual green investment by 2025 is a real economy investment benchmark to judge progress in greening the financial system.”

The new ESG tags will enable bond issuers and investors to instantly identify and categorise securities that contain ESG attributes, distinguishing them as green, social, or sustainability bonds. ESG categorisation is determined by CGS upon review of primary offering documents as part of the CUSIP issuance process.

The CUSIP is a nine-character alphanumeric security identifier that captures the unique attributes of issuers and their financial instruments throughout the US and Canada. In the US bond market, the CUSIP is used by investors to uniquely identify and track securities and link them with the underlying issuing entity. With this enhancement of its data feed and desktop products, CGS will append a text-based descriptor to the standard CUSIP ID for ESG bonds designating them either a green, social or sustainability-oriented bond. The new attributes, which cover municipal and corporate debt, are provided at no additional cost and will include the verifying third party when available.

“With total new issuance volume for green, social and sustainability bonds reaching nearly USD500 billion in the first half of 2021 alone, it is clear that ESG principles have become a major priority for issuers and investors alike,” says Scott Preiss, Managing Director and Global Head of CUSIP Global Services. “By clearly tagging ESG bonds in the pre-market environment – and providing granularity on the specific type of ESG bond being issued – we are making it possible to seamlessly track these securities throughout the financial system using our universally recognised, industry standard taxonomy.”

The ESG segment of the bond market has experienced an average annual growth rate of 49 per cent since 2016, with the largest share of volume and deals coming out of the US market. Attractive both for their social benefits and the cost-advantages afforded to issuers, ESG bonds have become a cornerstone of many investor portfolios. As the segment continues to grow, this new enhancement to CGS’s data feed and desktop products will deliver the critical reference data necessary to track ESG bonds throughout security master files, risk systems and trading platforms worldwide.

For municipal bonds, the new ESG attributes can be further supplemented by CGS’ collaboration with ISS ESG (formerly ACRe Data), which links proprietary ESG scores for US municipalities to CUSIP municipal issuer codes. The ISS ESG scores, updated quarterly, offer additional ESG insights into US municipalities using a number of criteria, including socioeconomic, infrastructure, and climate-based factors.

The fund, which takes an innovative approach to incorporating the sustainability characteristics of sovereign bonds into an investment strategy, will launch in October 2021 with a GBP100 million initial investment from Aegon UK. The fund will be available to those saving through their workplace pension as it becomes a component of Aegon UK’s Universal Balanced Collection which is widely used as a scheme default fund. The fund will also be available directly through Aegon AM, subject to completion of registrations.
 
In January 2021 Aegon UK committed to making its default pension fund carbon net zero by 2050 and to halving it carbon emissions by 2030. It follows recent action that have seen it transition over GBP10 billion of default assets into carbon optimised strategies.
 
GEFI is an independent organisation focused on driving positive change in the finance community to deliver more private sector capital into the UN’s Sustainable Development Goals (SDGs). GEFI is based in Scotland but has global reach and is committed to growing the sustainable finance ecosystem through advisory and research projects, strategic campaigns, events and practical products.
 
GEFI will be launching its SDG Financial Products Platform at COP26. The platform is the result of a long-standing collaboration between GEFI and the United Nations Development Programme (UNDP) to develop innovative financial products aligned to the UN’s Sustainable Development Goals. The platform works with partners throughout the product lifecycle to share learnings and build the ecosystem of SDG aligned financial products across asset classes. The platform only works with financial institutions that demonstrate a genuine commitment to the 2030 SDG agenda. New partners from different asset classes are invited to apply to become platform partners.
 
The Aegon Global Sustainable Sovereign Bond Fund, managed by Aegon AM, has been selected as a leading and innovative example of sustainability alignment by GEFI and will be a founding partner of the platform. The fund will feature in events during COP26 including a reception on Finance Day, which takes place on 3 November. GEFI’s exclusive platform launch event on 2nd November will include a presentation from Aegon AM’s Sustainable Sovereign Bond team who will discuss fund’s construction and objectives as well as the role of sovereign bonds in sustainable investment portfolios. The events at COP26 for the platform launch will include high-profile attendees from the international finance community and representatives from the Scottish Government and the UNDP.
 
The Aegon Global Sustainable Sovereign Bond Fund will be managed by government bond specialists within Aegon AM’s Global Fixed Income Platform, which has 136 fixed income investment professionals across the UK, the US and the Netherlands. They are supported by a 17-strong Global Responsible Investment Team, led by Brunno Maradei. The fund invests in financially strong countries that are making significant progress towards the sustainability targets defined by the SDGs. The introduction of a sovereign bond fund provides additional choice for sustainable investors looking to diversify their portfolios.
 
Commenting on the new fund, Brunno Maradei head of responsible investing at Aegon Asset Management, says: “We are delighted to be selected by GEFI as a leading example of sustainable investing. We are proud to work with them and our partners at Aegon UK to promote the new fund at COP26. The alignment of sovereign portfolios with the global sustainability agenda facilitates responsible capital allocation, which has positive long-term social and environmental impact.”
 
Tim Orton, Managing Director, Investment Solutions at Aegon UK says: “As a long-term savings provider, we want to help our customers align their investments with a fair and sustainable future. As such, Aegon is committed to action on mitigating climate risk and progress towards our net zero carbon targets. The fund is a prime example of the industry breaking new ground, allowing this key default fund to invest in sustainable strategies across a broader range of asset classes than most default funds have achieved to date. The fund has been selected as a leading and innovative example of sustainability alignment and will form an important first milestone for customers in the Universal Balanced Collection. Climate finance will be a key discussion point at COP26 and we are pleased to partner with GEFI and Aegon Asset Management to promote the importance of innovation and the launch of the fund.”
 
Omar Shaikh, co-founder and director at GEFI, says: “We are delighted to launch our SDG Financial Products Platform at COP26 which will support our ambition to see the UN Sustainable Development Goals delivered by 2030. Aegon have demonstrated real leadership with this GBP100 million commitment and have shown how private sector investment and innovative products can be delivered for the benefit of people and planet. We are excited to work with Aegon to build out the ecosystem of sovereign bonds and sustainability.”

In consultation with global central banks, the fund will be designed to provide a pipeline for central banks to invest in high-quality bonds issued by sovereigns, supranationals, and corporates that comply with strict international green standards.
 
The fund will work closely with the Asian Development Bank (ADB) and other development financial institutions as well as other issuers.
 
“This initiative to connect the central banking community with the development financing community represents a concrete contribution in our collective efforts to combat climate change in the Asia-Pacific, a region that not only has the largest need for green infrastructure investments, but also is among the most vulnerable if actions to combat climate change are not taken urgently,” says Agustin Carstens, General Manager of the BIS.
 
“ADB is committed to addressing climate change and has recently raised its climate finance level of ambition to USD100 billion. The combination of ADB’s growing pipeline of investable projects and its green bond program can help pool additional resources into green infrastructure financing in Asia and the Pacific. The ADB-BIS collaboration is an important milestone towards creating confidence to channel resources to support the greening of Asian economies,” says Masatsugu Asakawa, President of the ADB.

Totalling EUR50m, these three-month debt instruments are designed to finance sustainable investments made by SNCF Group under its Green Bond Framework.

Mirova a Natixis Investment Managers affiliate dedicated to sustainable investment and a pioneer in green bonds, worked with SNCF to develop the product and has subscribed to this ground-breaking global issue.

SNCF Group plans to use the funds from this new debt instrument to finance sustainable investments and operations contributing to its energy transition, including recycling, decontamination, power purchase agreements for renewable energies, and more.
 
SNCF partnered with Mirova, a top-tier investor specialised in green finance, to ensure that this new financing programme met its demanding standards. By subscribing to the full amount of the first issue, Mirova is putting its weight behind the success and growth of this breakthrough format.
 
Both SNCF Group and Mirova see the programme as a way to expand green finance and promote best practice to step up the pace of investment in the energy transition.
 
The move is part of SNCF Group’s broader strategic shift to greener financing products. It follows the 2016 launch of its Green Bond programme (the fifth-largest in Europe and sixth-largest worldwide), and the 2019 signature of a EUR3.5 billion sustainability-linked syndicated revolving credit facility.
 
The new programme meets best practices defined by SNCF, including (i) additionality, which guarantees that green funds raised are used exclusively for new, sustainable investments; (ii) calculation of assets’ environmental impact over their full lifecycle; and (iii) transparency and traceability, with extra-financial performance verified by an external auditor.
 
Mass transit by rail plays a critical role in reducing greenhouse gas (GHG) emissions. In France, where the transport sector as a whole generates 30 per cent of total GHG emissions, rail accounts for less than 1 per cent of total CO2 emissions but carries 10 per cent of all freight and passengers. A train emits 50 times less CO2 than a car, and 80 times less than a plane, making it the most efficient, eco-friendly mode of transport by far.
 
SNCF Group’s parent company SNCF SA has earned non-financial ratings of 74/100 from Vigeo Eiris, taking top spot in the “Transport and Tourism Europe” category, and 77/100 from EcoVadis, putting it among the top 1 per cent of companies evaluated in the sector.
 
Mirova is a management company dedicated to sustainable investment. From the start, it pioneered new approaches to deliver solutions that reconcile investment performance with environmental and social impact. Mirova has helped to create and develop new products and asset classes with major benefits for the environment and society, and it was one of the first investors in green bonds. Since 2012, the company has worked with both clients and issuers in green bond markets, and has played an active role in discussions aimed at structuring the market to set the highest standards. Mirova currently manages nearly EUR3.2 billion in green and social bonds.
 
Laurent Trévisani, Deputy CEO Financial Strategy, SNCF Group, says: “This first ever green commercial paper issue demonstrates SNCF Group’s innovative capacity and our commitment to growing the green finance market. We wanted this programme to meet the highest standards, and we are proud to have partnered with Mirova, a demanding and widely recognised player in green finance. We hope it will pave the way for other issuers in the emerging green commercial paper market.”
 
Hervé Guez, CIO Equity & FI at Mirova, says: “Rolling out electric-powered mass transit on a large scale is one way to keep global warming below the 2°C target. It’s been a pleasure to work with SNCF, an issuer committed to fighting climate change. We are particularly proud to have contributed to its green commercial paper programme, designed to help finance increased use of rail as an alternative to cars, which are still largely powered by fossil fuels. At Mirova, we are convinced that greener debt instruments are essential to promoting a low-carbon economy.”