When Australia issued an inaugural A$7 billion ($4.7 billion; €4.3 billion) green sovereign bond in June, it was not only a landmark for the country, but also for bond buyers.
Almost all of the world’s top-rated sovereigns have now joined the ranks of green bond issuers. The Netherlands was the first triple-A sovereign to go green in 2019, and Germany and Sweden followed suit in 2020.
Then in 2022, the green bond boom year saw four more triple-As come to market – Canada, Denmark, Singapore and Switzerland – as well as AA+/Aaa New Zealand.
That leaves just two outliers in the triple-A cohort, Luxembourg and Norway. The big gap in the market, however, is one notch below – the US. So far, a green US Treasury has remained elusive – but there are signs that the world’s largest sovereign borrower may be slowly moving towards issuance.
One source with direct knowledge of discussions told Responsible Investor that, while there had been some scepticism at the start of the Biden administration, the Treasury is now more open to the idea.
Indeed, the Treasury Borrowing Advisory Committee, a group of big banks and investors that presents recommendations on debt management issues, noted in an April report that green bonds “could warrant further study”.
“Obviously the exact timing is uncertain, but I do think it’s going to happen,” says Jamison Friedland, a US-based sustainability analyst for AXA Investment Managers.
No shortage of demand
If it does, market participants say there is likely to be no shortage of demand.
Many investors hold treasuries for cash management or de-risking, so green issuance could allow them to call these allocations sustainable.
John Ploeg, co-head of ESG research at PGIM Fixed Income, also points to an increase in the number of ESG-labelled money market funds. “I imagine they would be quite excited about the prospect,” he says.
Green bond funds with a global portfolio will also welcome an opportunity to diversify away from euro-denominated bonds into high-quality, liquid dollar holdings, says Trevor Allen, head of sustainability research for BNP Paribas’ Markets 360.
“Dollar-denominated bonds only made up 15 percent of green issuance last year and a large portion of the market is hard-currency issuance, where the country of risk is higher than that of the US,” he says.
“We see a green UST being able to appeal to investors globally, due to the high liquidity of Treasuries and the relative scarcity of dollar govvies in comparison to euro govvies.”
Whether demand would be sufficient to generate a pricing benefit for the US federal government remains to be seen.
Allen suggests that the greenium for an inaugural green Treasury could be between 5 and 8 basis points. “For a government bond, that’s quite significant,” he says.
By contrast, Amy Hauter, portfolio manager and director of sustainable fixed income at Brown Advisory, believes it is “not really clear” that there would be any greenium.
While significant demand could result in a lower yield, she says, the basis points are “so minimal already within that asset class that I don’t think you’re going to see a meaningful shift in terms of the cost of capital for the Treasury”.
PGIM’s Ploeg agrees that pricing benefit is likely to be a secondary consideration for US policymakers, pointing to the relatively small greeniums seen by other sovereigns.
Where a green Treasury could add value, market participants say, is by expanding and diversifying the investor base for longer-dated US government debt.
As Ploeg notes, issuance of US sovereign bonds has jumped since covid-19. The volume of treasuries outstanding at the end of June stood at $27 trillion, versus $16.7 trillion at end-2019. The figure jumped 10.2 percent in 2023 alone.
At the same time, two of the main buyers in recent years have been reducing their holdings. The Federal Reserve began letting its portfolio – built up during the years of quantitative easing – run off in 2019, and started active selling as part of its quantitative tightening programme in June 2022.
Demand from foreign investors, traditionally a mainstay of the market, has continued to grow but has not kept pace with the increase in issuance.
The share of treasuries held by foreign investors has fallen from 50.2 percent at end-2013 to 33.3 percent at end-March. China’s appetite for US debt has been particularly closely watched. According to Bloomberg, sales of treasuries by Chinese accounts in the first five months of this year totalled $79.7 billion, an all-time high for the period.
“There is some concern that the amount of Treasuries is growing and the two biggest holders of Treasuries are shrinking,” says Ploeg.
Project supply
Another positive indicator for green Treasury advocates is the ample supply of projects suitable for funding allocations, particularly since the implementation of the Inflation Reduction Act (IRA) in 2022.
Assuming that the choice of projects will mirror those that are incentivised by the IRA –such as carbon capture, utilisation and storage (CCUS), hydrogen and electric vehicles – BNP Paribas estimates the eligible funding pool at up to $50 billion.
AXA IM says modernisation of the energy grid, very large infrastructure projects and adaptation against extreme weather events could also feature high up on the list. As a result, says Friedland, there will likely be at least $30 billion of potential projects and potentially as much as $90 billion.
As a side benefit, he notes, this would offer US federal agencies in the US an opportunity to get positive PR for projects they are working on. “Instead of being on a website of a smaller organisation it can be part of an allocation report, it can be talked about,” he says.
Given the vast pool of projects, however, Brown’s Hauter warns that the US needs to “take the time to be very careful” when designing the bond.
She floats clean energy, drought resiliency and climate research as possible focus areas for allocations. At the same time, she notes: “There are so many different areas that could be funded here. I think there’s going to certainly be some pushback, or some negative sentiment around what is included.”
Similarly, Ploeg notes it would be difficult to create additionality with the programme.
“I’m not sure how much impact these green Treasuries would actually have on transitioning the country,” he says. “The motivation isn’t because they have green projects that they need to fund that they can’t fund. It’s because they want to diversify the Treasury base.”
Political tensions
As with so much in the US, however, what happens in the near term will likely depend on the outcome of this year’s presidential elections.
No one is expecting a green Treasury before November’s vote. As Ploeg notes, it would be “a tough one to jam in right before the election”. However, he believes that an inaugural issuance is likely in the event of victory for the Democrats’ Kamala Harris.
Market participants say a Donald Trump win would make it less likely, given the former president’s opposition to the IRA, electric vehicles and sustainability more broadly.
However, Hauter says that she would not rule out a green Treasury under a Trump administration.
“A Republican win this year could certainly put pressure against this moving forward,” she says. “That being said, the US Treasury is a separate entity and they could certainly forge ahead with putting out a green bond and thinking through the green bond programme, particularly if it’s going to take a couple of years to think through.”