The continued high level of issuance in the primary catastrophe bond market in April 2017 continued to drive an increased level of trading activity in the secondary market, as investors and ILS funds looked to swap in and out of positions as they managed new issuance allocations and the flow of maturities as well.
Following on from a more active March 2017, which saw secondary cat bond market activity stimulated by the level of primary issuance, April saw this trend continue with liquidity increased and the volume of names and notes traded remaining high as well.
There were $1.73 billion of new cat bonds issued during April 2017, a level of issuance which would always stimulate some requirement for portfolio rebalancing as cat bond investors and ILS funds look to shift in and out of positions.
But also adding to the requirement for liquidity was a huge level of maturing bonds, with $3.07 billion maturing during the month of April and resulting in significant capital liquidity in the market looking for a home to be invested in.
Commenting on April’s primary market and how it affected the secondary trading desks, Craig Bonder, Managing Director at AK Capital said; “The market again digested a large amount of new issuance, with nearly $2 billion of issuance pricing and settling with another $2.1 billion or so being announced to either price or settle in the month of May.”
“To make room for this issuance and manage inflow and outflows, portfolio rebalancing resulted in quite an active secondary market for a second month in a row,” he continued.
Bonder said that he saw almost thirty different cat bond names trade during the month, with a number of these trading multiple times over the course of April.
Interestingly, activity was high enough that Bonder noted how flows of capital in the secondary market dropped and accelerated again on either side of the April holidays, a sure sign that investors were keen to execute trades.
The significant flows into the secondary cat bond market and from maturities did have an effect on pricing, Bonder said, with the “Sheer volume of capital that needed to be placed causing spreads to further widen and prices to fall slightly.”
Swiss based ILS and cat bond investment manager Plenum Investments also recognised similar trends of higher activity continuing in the secondary market, helped along by the primary issuance level.
“On the back of the strong activity in the primary market, the secondary market for CAT bonds continues to be very active. Market participants are rebalancing their portfolios which created a healthy secondary deal flow,” Plenum explained.
However Plenum also noted some U.S. wind cat bond prices continuing their typical seasonal decline as would be expected in advance of the Atlantic hurricane season.
It’s hard at this stage to forecast how secondary pricing will react once the bulk of the May primary issuance and any in June has been completed and placed. Will that soak up investor demand, giving prices a little respite, or will the demand continue as investors and ILS funds work on rebalancing their portfolios over the summer?
May is likely to be another month of higher secondary trading activity, with the significant level of issuance (more market records achieved) already completed and set to complete during the month continuing to push cat bond investors and ILS fund managers to optimise their portfolios, to make room for new positions.
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