Spread tightening lifts secondary catastrophe bond indices

by Artemis on August 27, 2013

Spread tightening on catastrophe bonds exposed to U.S. wind risk has lifted the secondary cat bond market indices in recent weeks. Now deep in the middle of the Atlantic hurricane season, typical seasonality has returned to secondary cat bond prices and values have increased on hurricane exposed bonds.

Throughout 2013 we’ve seen some atypical price movements on secondary cat bonds, largely due to supply and demand issues created by an influx of capital looking to be invested in the sector. This has led to some unusual patterns, with secondary cat bond prices rising when they would typically fall, and vice versa.

Since the end of July the price return of the outstanding cat bond market, as measured by the index calculated by reinsurer Swiss Re, has seen a strong rise as U.S. wind-driven seasonality kicked in. This has helped the index climb further, almost returning to highs seen earlier this year, and has also stimulated a steeper rise in the total return of the outstanding cat bond market as well.

So, it’s time for another look at the Swiss Re Global Cat Bond Performance Price Return index, which tracks the price return for all outstanding USD denominated cat bonds. This index had dropped down to a recent low point of 95.03 on the 26th July, since which it has seen strong gains, finishing at 95.78 on the 23rd August. That’s a gain of just under 0.8% in a month, much stronger performance than we’ve seen since much earlier this year.

Swiss Re Global Cat Bond Performance Price Return Index

Swiss Re Global Cat Bond Performance Price Return Index

Next we turn to the Swiss Re Global Cat Bond Performance Total Return index, which tracks the total return of a basket of natural catastrophe bonds. This index has risen strongly through August, from a level of 253.54 on the 26th July to stand at 257.13 on the 23rd August. That’s a gain of just over 1.4% in a month, very strong performance which will be reflected in fund managers returns at the end of the month.

Swiss Re Global Cat Bond Performance Total Return Index

Swiss Re Global Cat Bond Performance Total Return Index

This strong performance will help any ILS fund managers who have large investment allocations in catastrophe bonds to achieve more attractive returns over the next few months, or as long as this spread tightening continues. How far spreads will tighten is hard to say, but we’d expect this trend to continue for another few weeks while we move through this peak of the 2013 Atlantic hurricane season.

Further spread tightening can only help to further promote catastrophe bonds benefit to an investment portfolio. As we wrote last week, catastrophe bond returns are again outperforming benchmark corporate debt investments in 2013 and the strong performance from August, which may be repeated in September, will help the asset class extend that lead.

We’ll be back to review these indices again in another few weeks.

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