Demand pushes secondary cat bond prices higher in February 2017

by Artemis on March 21, 2017

The excess demand for investments in catastrophe bonds has begun taking its toll on the secondary market in 2017 already, beginning to push prices higher as issuance in the primary market fails to keep up with demand.

Despite the fact the cat bond market is heading for a new first-quarter issuance record, as long as every deal completes to size this will be the third first-quarter in a row with record issuance according to Artemis data, this still hasn’t been enough to satisfy the ILS investor base.

With the primary 144a cat bond market relatively slow in February, with largely privately placed cat bonds being completed and issued aside from the $180m Skyline Re, secondary market trading was as a result slower, according to Craig Bonder, Managing Director at AK Capital.

“Lower new issuance for the month combined with continued strong buy demand for paper caused bond prices to continue to rise and limited secondary trading in February,” he explained.

Continuing; “Overall only eighteen particular credits exchanged hands according to Trace for the month and we saw quite a few stretches where there would be multiple days of inactivity.”

With March seeing almost $1.15 billion of 144a catastrophe bond issuance the expectation is that secondary market trading would pick up during the month.

Zurich, Switzerland headquartered ILS and catastrophe bond investment manager Plenum Investments, commented; “We anticipate trading activity to increase again in parallel with the new issuances activity in the primary market. The allocation of new bonds will trigger rebalancing efforts of ILS Investors in order to make room for the positions and to adjust the risk profiles of their portfolios.”

Plenum Investments also explained that the “demand driven price increases” in February helped to offset seasonal spread widening, helping drive cat bond fund performance during what is usually a lower returning month.

Demand is anticipated to continue driving secondary market pricing, despite the record issuance being seen in Q1 2017, as this is not expected to soak up excess investor demand.

“We anticipate that the increase in primary market activity will not be sufficient to satisfy the strong demand and that there will be continued upward pressure on CAT bond prices,” Plenum said.

Also read:

Fairly active secondary market in Jan 2017, demand overhang remains.

Very active December secondary cat bond trading closes out 2016.

Short-dated cat bonds lead November 2016 secondary trading.

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