January 2025
Fixed Income Monthly Report
Chris Edmonds
President, Fixed Income & Data Services
ICE
Are markets finally beginning to price in climate risk?
The ICE Climate and Pricing teams are closely monitoring the devastating wildfires burning throughout Los Angeles and thinking about those affected. The human toll of these events is hard to comprehend, especially while the full extent of the damage remains uncertain. The devastation has exposed a significant need to better understand the price impact that climate events - directly or indirectly - have on related securities.
Over the past two weeks, many fixed income clients have reached out to ask what our climate data is showing in terms of the broader financial impacts of these fires. As of January 14, ICE had identified over 6,000 municipal securities and 150 municipal entities that are tied to locations with material exposure to the Palisades, Eaton and Kenneth fires. In addition, analysis by ICE Climate and our Municipal Bond Pricing team has found that Los Angeles County bond spreads are beginning to widen significantly as the fires continue to burn.
Los Angeles municipal revenue bond yields spike as California wildfires intensify
Source: ICE. Data as of 01/21/2025
The teams compared yields on a generic AAA-rated U.S. municipal bond against two revenue bonds issued by the LA Department of Water and Power. While all three curves tracked each other over the past month, spreads on the Water and Power bonds abruptly jumped as the wildfires intensified on January 9, with yields ~55 basis points higher than those for the AAA curve as of January 15.
This is the first time ICE analysts have observed muni bond spreads widening in response to a climate-related event. When the teams conducted comparable analyses on bonds issued by communities in Florida and North Carolina impacted by Hurricanes Milton and Helene in 2024 no meaningful spread differences were found.
If this trend continues, the 2025 Los Angeles fires may come to be seen as the point at which investors began to incorporate climate risk into their investment decision making. If that’s the case, a new era may be beginning in asset valuation.
Municipalities will have to grapple with the fiscal constraints that come with rising borrowing costs from climate risk. With $4.2 trillion in municipal bonds outstanding in the U.S. at the end of 2024, a rise in yields of just 30 basis points would increase municipal borrowing costs nationwide by more than $120 billion, a shortfall likely to be met by cuts to public sector employees and services.
Such pressure would be compounded by the additional investments municipalities need to make in climate adaptation infrastructure to protect their populations. In short, borrowing costs may be going up due to climate risk at the same time municipalities need to borrow more to protect against those very risks.
Municipal bonds are just one asset in which climate risk exposure may ultimately influence valuations. Climate impact has not - as of yet - been identified as being priced into the residential mortgage-backed securities (MBS) market. While geographic dispersion of the underlying mortgages within a mortgage bond will reduce investors’ exposure to localized disasters, as extreme weather events become more frequent and intense, it seems only a matter of time until climate risk begins to be factored into the U.S. housing sector.
The more immediate impact will be in the home insurance market. Prior to 2025, many of the largest U.S. property and casualty insurers had already stopped writing new home insurance policies and renewing existing policies in California in response to mounting wildfire risk.
In the wake of the destruction in Los Angeles, it seems likely more private insurers will exit the state. This will put even more pressure on California’s already strained state-backed FAIR Plan fire insurance program, which has seen its residential insurable fire exposure balloon from $153 billion in 2020 to $458 billion in 2024, $5.9 billion of which is concentrated in the devasted Pacific Palisades.
As the total cost of this disaster is accounted for in the weeks and months ahead, ICE will continue to closely monitor additional impacts in the U.S. mortgage, real estate, and municipal bond markets and share our findings with you.
Fixed income in 2025: what we’re watching
For U.S. bond markets, the outlook for 2025 is nothing if not uncertain: the path of fiscal, trade and monetary policy all hang as question marks of consequence. For many market participants, it’s a backdrop that presents opportunity - and risk which needs to be managed. Read more from ICE’s President of Fixed Income & Data Services Chris Edmonds about five areas we’re watching as the year unfold.
Creating clarity in the MBS market through better data
The $11 trillion U.S. mortgage-backed securities (MBS) market is one of the world’s largest, most liquid fixed-income segments. Yet valuations and modelling of MBS performance have remained broad historically, given the lack of granular data on the assets underlying these securities. ICE’s Julian Grey, executive VP of Data & Analytics in our mortgage data business, spoke with The DESK to discuss how access to better data can help investors, mortgage loan buyers and securities issuers.
What’s driving the Asia-Pacific boom in ETFs
Greater appetite for fixed income ETFs and products with exposure to forces that could reshape the world economy - like artificial intelligence and automation - are underpinning demand.
ICE Indices year-end review
Data from a handful of ICE’s more than 7,000 indices reveals that markets moved higher across virtually every asset class in 2024. Our year-end indices review presents annual total returns from 2015 to 2024 across ICE’s global and U.S. equity and fixed income sectors along with commodity indices, and highlight some notable results.
LA wildfires: market reaction
The California wildfires have put a spotlight on the municipal bond market, with over $1 billion worth of muni issues by LA counties potentially impacted.
ICE’s Nick Peters analyses the market reaction.
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