Create a positive impact
Impact bonds address a wide range of social and environmental issues. Fixed income assets play an important role in realizing impact investing, as corporates tend to finance multiple times in the market. As participation in impact bond investing becomes more widespread, it would encourage companies to make ongoing commitments to sustainable development or issue sustainable bonds, thereby accelerating the positive transformations in society and the environment.
Pursue investment returns
As investors become more aware of impact investing, there is a rising desire for sustainable investment options. Investors who focus on sustainable development trends will have a broader investment scope, which is beneficial for improving medium and long-term investment performance.
Deposit rates are hovering at relatively high levels. What is the appeal of impact bonds?
Although rates are still on the rise, the US is approaching the end of its rate hike cycle, and the magnitude and frequency of future hikes should ease eventually. As rates peak, yields will likely edge lower, prompting bond prices to rise. Bank deposit rates may be attractive now, but when the rate hike cycle ends, interest rates will fall and so will bank deposit rates.
To issue an impact bond, the issuer needs to fulfill the requirements pertaining to impact investing. Hence, most of the impact bonds are issued by companies of Investment Grade. Their credit ratings are generally higher with relatively lower default risks.
Looking back at previous rate cycles, when rates peaked and plateaued, bond prices were already on their ascent, reflecting rate cut expectations. Between 2018 and 2019, when rates plateaued during those seven months, the cumulative gain of Asia Investment Grade bonds¹ was 9%. Bond prices extended their gains when rates subsequently trended lower.
When buying into bonds at this stage, one can lock in attractive yields, and benefit from the increase in bond prices when rates start to fall. Investors may keep an eye out for such investments opportunities or entrust their investments to professional fund managers to capture returns from both yield and capital appreciation.
1. Source: Bloomberg, peaking rates data sourced between 19 Dec, 2018 and 30 Jul, 2019. "Asian Investment Grade bonds" is referred to ICE BofA Asian Dollar IG Corporate Index.