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S&P 500 Companies Issued USD 775 Billion of Bonds in 2017

Is the Needle Moving on Sustainable Business?

Rieger Report: Municipal Bond ETFs - 10 Years of Growth

Most S&P and Dow Jones Islamic Indices Outperform Conventional Benchmarks in 2017 Driven by Strength in the Technology Sector

Turning Point in Bond Yields

S&P 500 Companies Issued USD 775 Billion of Bonds in 2017

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Jason Giordano

Director, Fixed Income, Product Management

S&P Dow Jones Indices

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2017 was the sixth consecutive year of record U.S. corporate bond issuances, as companies continued to take advantage of the accommodative environment created by low interest rates and strong investor demand. As measured by the S&P 500® Bond Index, 325 companies came to market for a total of over USD 775 billion in 2017.

Approximately 65% of issuances were refinancings, with corporations looking to lock in lower interest rates and extend maturities. Of the nearly USD 800 billion of bonds to enter the index in 2017, 20% of issues were 30-year term deals, lifting the weighted average maturity of the index close to its 2015 peak (see Exhibit 1). The remaining USD 270 billion of net new issuance propelled the market value of the S&P 500 Bond Index to over USD 4.5 trillion by the end of 2017—an increase of 2.0 trillion since 2011 (see Exhibit 1).

As expected, financial corporations were the top issuers in 2017; companies in the information technology and consumer discretionary sectors filled out the top three. Combined, companies from these three sectors accounted for more than 50% of all debt issuances to enter the index in the year. Issuers from all 11 GICS® sectors were represented (see Exhibit 2).

The 10 largest non-financial issuers accounted for over USD 180 billion of activity in 2017. Activity related to mergers and acquisitions was a predominant driver of bond issuance, as 6 of the top 10 issuers were involved in some form of M&A in 2017. Share buybacks and dividends were also a popular use of proceeds. Both Apple and Microsoft issued bonds to help fund their expanded share repurchase programs (see Exhibit 3).

For more information on the S&P 500 Bond Index, please visit https://spindices.com/indices/fixed-income/sp-500-bond-index.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Is the Needle Moving on Sustainable Business?

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Dr. Richard Mattison

Chief Executive Officer

Trucost, a part of S&P Global

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2018 is set to be a major year for sustainable business. The new year is a time to take stock of where we are going—and we are grateful for the opportunity to dig deep into our data to answer the question: “Is the needle moving on sustainable business?”

Each year in the State of Green Business Report, we assess more than 30 indicators of corporate sustainability performance across the world’s top companies.

First, the good news.

  • The carbon emissions of the world’s largest businesses continue to decrease in absolute terms, reaching the lowest level in the past five years as a result of a switch to cleaner fuels.
  • There have been some global improvements in water use and waste management.
  • The number of companies setting carbon and water reduction targets has increased by about 10% over the past five years.

However, the carbon reduction targets set by the 1,200 largest global companies and 500 largest U.S. companies fall short of the contribution needed to align with the 2°C target to limit global warming in the Paris Agreement.

Given that top global companies account for 10% of total emissions, Trucost calculates that the proportional reductions these companies need to make by 2050 and 2100 to align with the 2°C target are 3 and 5 metric gigatons of carbon dioxide equivalent, respectively. U.S. companies, which account for 4% of total emissions, would need to make proportional reductions of 1.2 GtCO2e by 2050 and 1.9 GtCO2e by 2100 in order to align with the 2°C goal (see Exhibit 1).

Yet the carbon targets set by top global and U.S. companies (0.7 and 0.2 GtCO2e, respectively) account for only 22% and 20% of their share of reduction needed by 2050, respectively. The targets currently in place are even smaller compared with the reduction needed by 2100, accounting for 13% and 12% by global and U.S. companies, respectively.

What’s Going to Change?

Carbon prices will need to reach USD 120 per metric ton by 2030 to achieve the Paris Agreement goal, according to modeling using the Trucost Corporate Carbon Pricing Tool. During this transition period, companies will need to understand how the intricacies of diverse carbon pricing policies could affect their operations, revenues, and supply chains—making use of forward-looking data and analytical tools capable of assessing carbon pricing risk under a variety of scenarios in different sectors and regions. The use of such tools by businesses is being encouraged by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.

Research by Trucost shows the potential impact of increasing carbon prices on companies. It found that 30% of profits in the automobile sector could be at risk by 2050, while the chemicals sector could have 60% of its profits at risk. The power sector could have its profits wiped out completely.

Many market participants we speak to agree that understanding carbon pricing risk is the key to unlocking more ambitious carbon reduction initiatives and greater investment. Scenario analysis can be used to make the case for setting ambitious carbon targets that are aligned with climate science. Investors want to understand how companies are using carbon pricing scenarios to mitigate risk and direct capital to innovations that will succeed in the transition to a low-carbon economy.

So yes, the needle is moving—and it’s time to get ahead of it.

Find out more in The State of Green Business 2018.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Rieger Report: Municipal Bond ETFs - 10 Years of Growth

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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The first Exchange Traded Funds (ETFs) tracking municipal bonds were launched in September 2007. Since then the municipal ETF market has grown to 40 ETFs representing over $30.5billion in assets under management.

Municipal Bond ETF Market Snap Shot:

  • 40 ETFs all but one represents tax-exempt municipal bonds. There is one ETF tracking taxable municipal bonds.
  • $30.5billion in ETF assets (4.4% of total ETF and mutual fund assets)
  • 8 ETFs have assets over $1billion
  • 16 ETFs have assets between $100million and $1billion
  • 16 ETFs have assets of less than $100million
  • 29 ETFs are passively managed (representing over 99% of assets)
  • 11 ETFs are actively managed (representing less than 1% of municipal ETF assets)

Chart 1: Municipal ETF and Mutual Fund Assets:

Chart 2: Number of Municipal ETFs and Accumulated Assets:

Chart 3: Active & Passive Municipal Bond ETFs:

For more information on the municipal bond market performance please go to our website www.spindices.coom

Please also join me on LinkedIn: www.linkedin.com/in/james-j-r-rieger-9324558

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Most S&P and Dow Jones Islamic Indices Outperform Conventional Benchmarks in 2017 Driven by Strength in the Technology Sector

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Michael Orzano

Senior Director, Global Equity Indices

S&P Dow Jones Indices

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Most S&P and Dow Jones Shariah-compliant benchmarks outperformed their conventional counterparts for the year as information technology companies—which tend to be overweight in Islamic Indices—gained a whopping 39.4% beating the overall market by a wide margin, and financials—which are underrepresented in Islamic indices—experienced some weakness. This marked a reversal from 2016 where a surge in the financial sector late in the year caused Shariah-compliant benchmarks to lag. One notable exception to the 2017 trend was in the middle-east where conventional and Islamic benchmarks tracked closely together since technology stocks are not a meaningful portion of the regional market.

Despite Strong Absolute Returns, U.S. Equities Lag Global Markets for the First Time Since 2012

Global equity markets powered higher in the 4th quarter capping a very strong 2017. The S&P Global BMI Shariah and Dow Jones Islamic Market World each gained about 25% for the year, beating their conventional counterparts by more than 300 basis points. Emerging markets continued to lead the way as the DJIM Emerging Markets Index closed the year up more than 40% supported by huge gains in large-cap Chinese technology companies such as Tencent and Alibaba. Developed Asia-Pacific markets also experienced notably strong performance in 2017 as the DJIM Asia-Pacific Index finished the year up nearly 36%. Despite closing near a record high and gaining about 20% on the year, the S&P 500® lagged international markets for the first time since 2012.

MENA Equity Markets Continue to Lag

MENA equities continued to lag broader global equity markets as geopolitical concerns weighed on sentiment and the regional equity market has seen little benefit from the weak dollar and boom in technology stocks that has powered emerging markets more broadly. The S&P Pan Arab Composite Shariah edged slightly higher in the 4th quarter, finishing the year virtually unchanged. Despite a double-digit rebound in December, the S&P Qatar BMI experienced the steepest losses on the year, falling almost 17%. Meanwhile, the S&P Egypt BMI rose 21% in 2017 as the country has experienced stability following the implementation of the IMF-supported economic reform program in November 2016. 

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Turning Point in Bond Yields

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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The ten year Treasury note closed with a yield over 2.5% this week, sparking talk that interest rates may have bottomed. The first chart shows the yield on the 10 year treasury going all the way back to 1953.  As seen there, the bottom in July 2016 at 1.5%. Last March the yield was 2.5%, it then fell to 2% in September before rebounding.

The bigger picture is revealed in the chart. We have either recently passed or appear to be approaching a major bottom in the bond markets.  With a few dips during recessions, Treasury note yields climbed steadily from 1954 until 1981, turned and began what was once called The Great Intergalactic Bond Rally. Starting in September 1981yields fell for the next 35 years.  While picking the precise bottom is challenging, it is increasingly likely that the long term decline in bond yields is drawing to a close.

Among the factors arguing that we are at a turn in bond yields are the economy’s current strength and momentum and the Fed’s decision to shrink its balance sheet and move away from quantitative easing as they raise the Fed funds rate.  Real US GDP growth in the second and third quarters of 2017 topped 3%. Real business fixed investment grew at 6% in the first three quarters of 2017. The unemployment is down to 4.1%. The economy is growing faster than its long term potential growth, putting upward pressure on interest rates.

The monetary policy that brought interest rates close to zero and supported the recovery from the financial crisis is over. The Fed’s attention is now directed at establishing a safety margin with the Fed funds rate well above zero so that it can cut rates when the next recession arrives.

A short term result of the Fed’s continuing increase in the Fed funds rate is a flatter yield curve as seen in the chart of the spread between the 10-year and two-year treasury notes.  Some analysts argue that a flattening yield curve may be pointing to future economic softness and might persuade the Fed to stop raising the funds rate. However, the current increase in the yield on the ten year treasury is giving the Fed more room for raising the Fed funds rate going forward.

Two by-products of the economy’s strength also support the idea that we may be close to a bottom in bond yields. Inflation expectations (see next chart) are no longer falling. Market participants and the Fed will be watching expectations and the unemployment rate for hints of when inflation could pass 2%.  Rising oil prices, now over $60 per barrel, are another sign that inflation could creep upward and encourage investors to seek higher interest rates.

The posts on this blog are opinions, not advice. Please read our Disclaimers.