Higher catastrophe bond spreads pressure secondary prices

by Artemis on April 12, 2012

We’ve written a lot lately about the gradual decline in secondary catastrophe bond prices and the downward pressure on the catastrophe bond price return index, our most recent article on this here. We’ve focused on the higher than normal primary cat bond market issuance volume as the main cause for reduced interest in secondary cat bond trading and hence a decline in prices. In March though, the trend changed and secondary trading volumes rose according to Zurich based ILS investment manager Plenum Investments and yet still prices dropped.

During March Plenum Investments noticed that the extremely active primary cat bond market (details on all those transactions in our Deal Directory) caused an elevated level of secondary market trading activity. The reason for the increased activity was that investors needed to adjust their portfolios to accommodate the multitude of new cat bonds which came to market and buying and selling secondary market cat bonds allows them to balance their portfolio diversification.

However, Plenum explained that the increased demand in the secondary cat bond market was not sufficient to counterbalance the high volume of new issuance at higher spreads, and this had the effect of exerting downward pressure on outstanding cat bond prices. As a result, overall the secondary market experienced spread widening in March and hence we saw the continued decline of the price return index.

So it is still brisk primary cat bond issuance that is the cause of the decline in prices of outstanding cat bonds but it seems activity in the secondary market has picked up in recent weeks. Given that April has seen a number of cat bonds complete it is possible that this trend will continue this month and it will continue to offer an opportunity to those seeking to enter the space.

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