UK's first green gilt draws record $137 billion demand

The government aims to raise £15 billion from two green gilt sales this year — a small fraction of the total £253 billion of gilt sales planned.
 British five pound banknotes are seen in this picture illustration taken 14 November 2017.
British five pound banknotes are seen in this picture illustration taken 14 November 2017.

The UK sold 10 billion pounds of its first "green" government bond on Tuesday after attracting over £100 billion ($137 billion) of demand from investors, a record high that shows the clamour for assets that can be marketed as good for the planet.

Proceeds from the sale will be ring-fenced for projects such as clean energy and transport and will also help the UK government burnish its green credentials before it hosts the UN's COP26 climate conference in Glasgow in November.

The UK has lagged behind other European countries such as Germany, Italy, and Spain in issuing this type of debt, partly because of concern that investors would want higher interest rates to compensate for a relative lack of liquidity.

But Tuesday's launch of the new gilt maturing in July 2033 represents the largest single sale by a sovereign issuer, topping the previous €8.5 billion record set by Italy in March.

"It's confirmation that the demand is there even in sterling, not just in euros," said Antoine Bouvet, senior rates strategist at ING.

Based on the secondary market, he estimated the deal was pricing in a roughly 3 basis point "greenium" — the slightly lower yield green bonds offer versus conventional debt, reflecting a dedicated investor base chasing a limited supply of these assets.

The UK has said it aims to raise around £15 billion in total from two green gilt launches this year — Tuesday's sale and a new 20- to 30-year maturity green gilt next month.

This issuance will be only a small fraction of the total £253 billion pounds of gilt sales planned for this financial year.

The new 2033 gilt will pay a coupon of 0.875% and has been priced to give a yield of 0.8721%, 7.5 basis points more than the conventional June 2032 gilt, a yield premium that reflects the longer maturity rather than a lack of liquidity for the new issue.

Matthew Amis, an investment director at Aberdeen Standard Investments, said the gilt had been priced more cheaply than some other green issues and offered fair value compared with conventional gilts.

"The lack of a significant 'greenium' has certainly added to the huge demand," he said. "We expect this gilt to perform well in the coming days and months."

The Bank of England has said it will buy green bonds as part of its asset purchase programme and treat them like similar conventional ones.

(Editing by Andy Bruce, Giles Elgood, and Emelia Sithole-Matarise)