Investment Institute
Fixed Income

Darkest before Dawn: A difficult year for green bonds but the outlook is optimistic

  • 18 July 2022 (5 min read)

Since the beginning of the year, fixed income has been massively impacted by a historic rise in rates combined with a widening of credit spreads. For green bonds, this difficult macroenvironment has resulted in historic negative returns; as at the end of June, the ICE BofAML Green Bond Hedged EUR returned -14.46%1 . Nonetheless, there are reasons to be optimistic for both the short term and long term outlook for this burgeoning fixed income asset class.

A challenging backdrop

The inflationary context that the fixed income market has faced has been accentuated by the conflict in Ukraine. This has pushed central banks to radically change their monetary policy stance: the US central bank has already raised its key rates by 1.5% and the market expects another 1.7% increase by the end of the year. Meanwhile, the European Central Bank (ECB) has announced the end of its debt purchase programme and is expected to raise rates by 0.25% in July (the first time this has happened since 2011), while the market is expecting 1.30% by the end of the year.

In this context, at the end of June, the US and German 10-year yields both rose by 150bp respectively to 3.01% and 1.34%2 . The rebound in rates has thus, in a few months, erased the rally observed over the last 5 to 10 years. Meanwhile, credit spreads, affected by the tightening of monetary policies and uncertainty about growth generated by inflationary pressures, have widened sharply.

Against this backdrop, the negative performance of the green bonds universe can be explained by the combination of the very strong rebound in interest rates and the wider credit spreads. Importantly, green bonds were more severely impacted than the conventional universe. This underperformance was mainly due to the difference in interest rate and credit sensitivity between the two universes.

Focus on green bonds’ tumult

At first glance, the difference in duration between the two universes is small. As the key characteristics table shows: 7.7 years for green bonds and 7.3 for conventional bonds.

However, part of the conventional universe is exposed to debts whose rates have remained relatively stable since the beginning of the year. The graph on the right demonstrates this with Japanese bonds, which contribute 1.3 years of the sensitivity, compared to the green universe which is mainly exposed to euro and US rates.

If we adjust for this bias, we can see that the green bond universe was much more exposed to the rebound in rates than the conventional universe. In addition, the green bond universe had a higher exposure to credit meaning they were more sensitive to the widening credit spreads seen this year.

Hence 2022 has provided the green bond market with the worst possible combination, resulting in a negative weighting, on relative returns, to conventional bonds.

Key characteristics 


Top 3 duration contributors by currency 


Sector breakdown 


Source: AXA IM, Bloomberg, ICE BofAML indices at at 30/06/2022

Opportunities ahead

This inflationary environment is likely to continue to fuel high volatility in the fixed income markets, which are torn between inflationary pressures and the prospect of recession. We believe that the current volatility will provide opportunities for those able to cope with it in the short term, while longer term, the current valuations offer attractive prospects for investors.

Another reason for optimisim is the current yield level: at the end of June, the yield on the green universe was 50% higher than that of the conventional universe (1.78% vs. 1.39% hedged in Euro). Next to this, the average spread of the green universe is 70bp higher (in terms of OAS) than that of the conventional universe, the highest level ever observed (as shown on the graph). The composition of the green bond universe has not changed, so the higher spread reflects a stronger repricing for the green universe than the conventional one. We believe this repricing may provide opportunities and suggests that there might be light at the end of the tunnel for green bonds

It is also worth remembering that for many investors the green bond universe offers a balanced risk profile.  Half of it is made up of corporate issuers (compared to 25% in the traditional bond universe) so while this has meant more sensitivity to credit spreads recently, in the long term, it offers the benefits of better diversification away from sovereign-related debts and better expected returns.

Alongside that, the main ethos of green bonds is still the same: allowing issuers to identify specific environmental-friendly projects to which investors can explicitly allocate their capital. By doing so, green bonds provide investors with a unique level of transparency on the use of funds which is a real advantage over conventional bonds. It is worth bearing in mind that not all green bonds are the same and an active management approach should give investors access to green bonds where the sustainability assessment is based not only on the projects they finance, but also on the overall strategy of their issuers.

While it has been a challenging year so far, with a competitive yield, attractive valuations and the long term benefits of a well balanced universe and transparency, there are reasons to be optimistic for green bonds.

Green vs Global broad universe's spread 


Source: AXA IM, Bloomberg, ICE BofAML indices at at 30/06/2022 

  • U291cmNlOiBBWEEgSU0sIEJsb29tYmVyZyBhcyBhdCAzMC8wNi8yMDIy

Related Articles

Fixed Income

Spread the word: Managing drawdown risks in corporate bond portfolios

  • by Salmane Lahdachi
  • 22 May 2023 (7 min read)
Fixed Income

Why now may not be the time to sell inflation-linked bonds

  • by Jonathan Baltora
  • 17 May 2023 (5 min read)
Fixed Income

US Investment Grade Market Update - April 2023

  • by Frank Olszewski
  • 05 May 2023 (5 min read)


    This website is published by AXA Investment Managers Asia (Singapore) Ltd. (Registration No. 199001714W) for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation or particular needs of any particular person and may be subject to change without notice. Please consult your financial or other professional advisers before making any investment decision.

    Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested. Past performance is not necessarily indicative of future performance.

    Some of the Services and/or products may not be available for offer to retail investors.

    This publication has not been reviewed by the Monetary Authority of Singapore.