Secondary cat bond prices moderate in October

by Artemis on November 12, 2015

The seasonal spread tightening in secondary prices of catastrophe bonds decelerated in October, as the U.S. wind season passed its peak and ILS investors and managers began to anticipate another loss free hurricane season.

After a few months of positive price movements on many outstanding catastrophe bond positions, the month of October saw that movement slow across the market, with some positions even proving negative for the month.

There was also an element of cat bond investors and ILS managers trying to take advantage of the summer seasonal price increases, to offload U.S. hurricane exposed cat bonds at higher prices. However there were more attempts to sell than completed sales, as other investors were reluctant to buy into these U.S. wind positions at recent high prices.

Zurich, Switzerland based ILS and cat bond investment manager Plenum Investments, noticed both the slowdown in price gains and the glut of bonds on offer.

“After strong gains during the summer, price increases of CAT Bonds slowed down during October. Offered amounts outweighed demand as some investors tried to realize the gains on US hurricane positions,” investment managers from Plenum explained.

Plenum felt that the “deceleration of the seasonal spread tightening occurred slightly earlier than expected,” this year. Perhaps a sign that investors have quickly come to expect that if no major storms have impacted the U.S. by mid-October then the threat has greatly diminished, particularly in a year where El Nino is a factor.

Additionally, Plenum said that the “anticipation of increasing primary market supply” also helped to weigh on secondary prices during the month.

Craig Bonder, Managing Director at AK Capital, said that his desk saw “a fairly active month in the secondary with strong two way flows on both short and longer duration credits.”

Bonder felt that a number of factors contributed to the slowdown in prices; “Portfolio rebalancing, new issue supply on the horizon, a storm in Mexico, and the very simple more offers than bids had prices level off this month and even drop on a few assets after we saw a strong run up in prices in late summer early fall.

Of course the other factor to affect the secondary catastrophe bond market in October was the impact of hurricane Patricia and the expectation that the MultiCat Mexico 2012 cat bond would face a loss. With the price of that bonds Class C notes having dropped by 90%+, it resulted in a negative total return for the market for the month, although that only really impacts those that held the cat bond.

The U.S. hurricane and tropical cyclone season technically runs to the end of November and just in the last day Kate has given a reminder to the market that storms do happen this late in the year. However, since the last few years have been so quiet, the market has perhaps got used to feeling like its all over by this time of year.

That could present opportunities to investors looking to pick up U.S. wind bonds as prices come off their highs. Or it could even leave buyers exposed to any late season surprise storms.

Also read:

Demand pushes secondary cat bond prices higher in September.

Cat bonds demonstrate low-correlation to financial markets in August.

Active cat bond trading in July, as performance turns positive.

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