Indexology^® Blog

The year 2021 started with a continuous sell-off in the U.S. Treasury bond market. Starting on the second trading day of the year, yield on the 10-year U.S. Treasury Bond rose for five consecutive trading days by 23 bps until Jan. 12, 2021, when strong auction results for the 10-year note pulled the yield back from its high. In the second half of January, Treasuries’ yield continued to trade lower before it ticked up by the end of the month and found itself in a new range safely above 1%. The yield uptick happened toward the end of the month amid the comments of possible further ECB rate cuts, reassurance of no bond taper for “some time” by the U.S. Fed chairman, and equity market volatility.

From Aug. 4, 2020, to the end of January 2021, the 10-year U.S. Treasury yield rose 56 bps, accompanied by a steadily rising breakeven inflation rate and steepening yield curve. The 10-Year Breakeven Inflation Rate rose by 53 bps over the same period. (This rate reflects the market’s inflation expectation and is calculated as the yield difference between the 10-year U.S. treasury note and Treasury Inflation-Protected Securities [TIPS]). Real yields on TIPS across the curve are trading in negative territory. On Jan. 21, the 10-year TIPS new-issuance auction drew yield at -0.987%, only 13 bps higher than Jan. 4’s record low. The 2s10s yield curve steepened by 56 bps since last August, to the steepest level since 2018.

The Breakeven Inflation Rate rebounded strongly from the pandemic-induced low in March 2020. However, to put it into historical context, the 10-Year Breakeven Inflation, at 2.10% as of the end of January, is 9 bps above the 20-year average and 17 bps above the 10-year average. In comparison, economists are forecasting 2.1% for 2021 inflation, according to a January survey conducted by Bloomberg. The latest inflation data, released on Jan. 13, showed a small increase, to 1.4% year-over-year.

Possible factors contributing to higher market-based inflation may be a weak U.S. dollar, market expectation of more economic stimulus, hopes of an improved economic outlook following the start of the COVID-19 vaccine rollout, and the Fed’s signal of willingness to keep inflation running higher than the 2% target before hiking rates. On the other hand, inflation skeptics may point to the slack in the labor market and in the output gap. It remains to be seen if loose monetary policy and expansive fiscal spending will push inflation up or not, but inflation concerns will likely remain in investors’ minds in 2021.

The U.S. Energy Information Administration (EIA) forecasts that power generation coming from renewable sources, such as wind, solar, hydro, and geothermal, should provide the majority of the world’s energy needs by 2050.¹ The use of renewable energy has been increasing significantly over the last decade, however its current level of consumption still lags those of traditional sources of energy.

The primary driver behind the shift from traditional energy sources, such as petroleum, natural gas, and coal, to renewables comes from a “critical mass” of governments around the world looking to adopt policies that seek to lower the global carbon footprint.

Most notably, the landmark Paris Agreement—which calls to keep the increase in global average temperature to well below 2°C above pre-industrial levels and aims for a climate-neutral world by mid-century—was signed by nearly 200 countries and went into effect in 2016.² There have been hiccups along the way, including the world’s largest economy and one of the largest carbon emitters, the U.S., withdrawing. However, the election of President Joe Biden in the 2020 U.S. election brought renewed hope given his campaign promises. Indeed, in the first few hours of taking office, the new president signed an executive order to have the U.S. rejoin the agreement in full.³

The renewable energy industry has grown over the last decade, rising from approximately 10% of all energy produced in 2010 to 22% as of November 2020 in the U.S.⁴ Despite this growth, significant additional changes are needed well before the mid-century mark to hit the stated climate goals. The need for increased renewable production and efficiency is perhaps evident, but more investment into equipment is needed as well to further support increased production and efficiency. In fact, the International Renewable Energy Agency (IRENA) has stated that annual investment in the renewables space must increase by almost triple to USD 800 billion between 2020 and 2050.⁵

Come 2050, electricity generation from renewables is expected to come from a well-diversified mix led by solar, wind, and hydro. Based on these projections, focusing on just one area of renewable energy would leave out significant exposure to the overall industry.

In addition, the clean energy push clearly needs to be a global phenomenon, as the growth in consumption through 2050 will primarily be from non-OECD countries.⁶ Therefore, having a global perspective when it comes to meeting the expected growth is useful.

With the surge in demand for renewable energy, companies in the clean energy space are poised for similar growth. How does one capture the theme and track the performance of clean energy companies? Launched in 2007,⁷ S&P DJI offers the S&P Global Clean Energy Index, which provides liquid and tradable exposure to 30 leading clean energy companies. The index attempts to represent the full clean energy ecosystem by including companies both on the production and the technology & equipment sides in the various segments of renewable energy across the globe.

¹ https://www.eia.gov/todayinenergy/detail.php?id=42555#

² https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement

³ https://www.whitehouse.gov/briefing-room/statements-releases/2021/01/20/paris-climate-agreement/

⁴ https://www.eia.gov/electricity/monthly/current_month/january2021.pdf

⁵ IRENA and CPI (2020), Global Landscape of Renewable Energy Finance, 2020, International Renewable Energy Agency, Abu Dhabi.

⁶ Organisation of Economic Co-operation and Development (OECD).

⁷ The index was launched on Feb. 22, 2007 with a base date of Nov. 21, 2003.

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