Sustainable investing

Mirova takes short-term view on maturities, not on impact

September 20, 2024 - 5 min

Agathe Foussard, CFA
Fixed income portfolio manager

A particularly relevant investment strategy

The first signs of a potentially stagflation-inducing configuration appeared in mid-2021, suggesting to Mirova that central banks would begin to increase their interest rates. And indeed they did, beginning with the BoE¹ which raised its key interest rates in late 2021 followed by the Fed² and then the ECB³. The momentum kept going throughout 2022 and also 2023; while inflation did end up being brought under control in Western economies, local economic growth proved far more resilient than expected against these interest rate hikes. The short end of the yield curve benefited two-fold: the yield curve inverted and has stayed that way, and interest rates remained relatively high and attractive compared with the levels that had prevailed in previous years.

Returns on a 1-3 year index and an all maturities index

Returns on a one year index and all maturities index

Source: Bloomberg, July 2024

Inflation has continued to ease since the start of the year but at a slower pace owing to economic strength in mainland Europe, the United Kingdom and the United States. All this has pushed back the prospect of monetary easing. Having not lowered its interest rates for five years, the ECB finally launched its monetary easing cycle in early June with a 0.25-percentage point cut⁴. Another downward revision is expected by yearend. This is therefore going to be a gradual and cautious easing process, one that supports Europe’s soft economic rebound (especially in Germany and Italy) and that keeps the term premium⁵ at a decent level in light of the heavy debt loads being carried by Western countries. Monetary support, having until now yielded returns in the region of 4%, is therefore likely to become less appealing⁶.

The Mirova Euro Short Term Sustainable Strategy invests primarily in green and sustainable bonds with maturities of less than 4 years and stands to benefit as key interest rates gradually fall and the inverted yield curve creates attractive carry opportunities.

The focus is now on short-term financing

We could see it coming for some time, and now it’s happening: a growing number of green and sustainable bond issuers are obtaining financing with shorter maturities than they used to before. This is excellent news for the Mirova Euro Short Term Sustainable Strategy, whose investment universe is expanding faster than we had expected when we launched it two years ago. Green, social and sustainable bonds with maturities of less than 5 years accounted for 33% of total issuance in 2023, compared with 21% in 2021 (source Mirova, BNEF). There is a very simple reason for this. From 2022 until only very recently, the financial backdrop has consisted of the main central banks hiking interest rates in their determination to tackle inflation. As a result, issuers having until recently obtained financing with long maturities and low interest rates have now revised their strategies. Many have opted for shorter maturities.

Another reason for issuers to prefer short-term projects is that a broad consensus has now emerged on the need to speed up the energy transition, and this is an objective that can easily be met with green and sustainable bonds. The transition needs to take place at each and every level of the economy in an effort to pave the way for a prosperous lowcarbon economy. Issuers require funding for a large number of projects in their drive to successfully complete this transition or to develop innovative solutions that will help them do so.

This is no longer merely a question of promoting projects spanning fifteen/twenty years, if not longer, but indeed of also funding immediate, concrete developments over three/four year periods. One particularly telling example is that of sovereigns and quasi-sovereigns, which are increasingly issuing bonds to address ESG⁷ issues, be it on a local, national or even supranational level. The average maturity of bonds issued by municipal and regional authorities has thus shortened from 8 years in 2021 to just over 5 years since the start of the year⁸.

¹BoE: Bank of England

²Fed (Federal Reserve System): US central bank

³ECB: European Central Bank

⁴Source: Bloomberg, August 2024

⁵The term premium corresponds to the risk premium on the bond market. It is the excess return offered to bond investors to compensate for their “patience” in investing for the long term rather than the short term.

⁶ Source: Bloomberg, August 2024

⁷ Environmental, Social, Governance.

⁸ Source: Mirova, Bloomberg NEF, at 30/06/24.

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