Fund managers pile into $65bn Covid-19 bond market

A new coronavirus bond market has reached $65bn in just a few months and is set to keep growing, as companies and governments rush to issue debt to help ease the effects of the pandemic.

The Covid-19 bond market — in which proceeds are earmarked to address impacts of the outbreak — could top $100bn by the end of 2020, according to analysis by Axa Investment Managers, which has invested roughly €230m in coronavirus bonds across its portfolios.

Issuers range from the World Bank’s International Bank for Reconstruction and Development, and the European Investment Bank, to the nation of Guatemala. Companies have also jumped in, including Bank of China, which sold the first Covid-related bond in February, and drugmaker Pfizer, which in late March issued $1.25bn in 10-year bonds designed in part to address the pandemic.

On Thursday, Bank of America came to market with a $1bn four-year Covid-19 bond to fund lending to hospitals, nursing facilities and healthcare manufacturers, among others, as they try to tackle the pandemic. The bank will pay investors a yield of 1.3 percentage points above benchmark Treasuries — broadly in line with the bank’s existing non-Covid bonds, according to CreditSights.

Simon Bond, director of responsible investment at UK asset manager Columbia Threadneedle, said he had been surprised by the speed of growth in the market. “Success breeds success, and now all of the most likely candidates have issued,” he said.

Analysts note that some of that growth appears to have come at the expense of so-called green bonds, which were much in vogue last year and had been expected to have another strong year in 2020. But as coronavirus bonds have taken hold, green bond issuance has taken “a back seat,” said Mr Bond.

Companies issued 40 per cent less high-grade green debt in April this year compared to the same month in 2019, according to Morgan Stanley.

A combined $32bn of so-called “social” and “sustainability” bonds were issued this April, the bank calculates, most of which were designated for Covid-19 response initiatives. This marked the first time that social and sustainability bonds eclipsed the issuance of green bonds in a single calendar month.

“Given the current economic climate, we expected weak issuance of green bonds,” wrote Allison Binns, a strategist at Morgan Stanley.

Investment banks are now scrambling to understand what use of proceeds from these new classes of coronavirus bonds will be accepted by socially conscious investors, said Stephen Liberatore, a fixed-income portfolio manager at Nuveen.

Covid-19 bonds do not always meet certain criteria for investors focused on purpose-led debt. The $4.9bn impact bond fund that Mr Liberatore manages opted not to buy bonds that Austria issued for Covid-19 emergency projects, for instance, as the usage of proceeds could not be measured.

Coronavirus bonds remain small in the context of the global debt markets. Since the first virus bond was launched at the tail end of February the total raised via bond sales of all forms is just over $2tn, according to Dealogic.

Nonetheless, demand for such debt is rising.

French public-sector lender Caffil issued a €1bn, five-year social bond to finance public hospitals affected by the pandemic. The deal late last month was more than four times oversubscribed — the highest rate of any bond issue since 2013 — and had the lowest coupon (0.01 per cent) ever paid on a transaction of similar size.

“There is definitely a rebalancing,” said Agnes Gourc, co-head of sustainable finance markets at BNP Paribas. “What is very striking is that there is far more interest in social bonds today than ever before.”