After slow start, cat bond trading picks up in October

Secondary catastrophe bond trading picked up towards the end of the month in October 2016 after a slow start to the month. Primary issuance stimulated some trading and the post-hurricane Matthew released pressure on affected secondary marks.

October can be a slower month in the secondary cat bond market, as the hurricane season is considered a peak threat in the month and primary issuance tends to be lower.

This year hurricane Matthew threatened the catastrophe bond market at the beginning of the period, posing the biggest threat to outstanding cat bonds and other ILS vehicles that has been seen for some years.

But activity on the secondary trading side of the cat bond market was slow for much of October.

“Overall it was a quiet month in secondary trading but one that did end with a flurry of activity,” Craig Bonder, Managing Director at AK Capital, explained. “As evidenced by Trace, the last few days nearly matched the entire month of volume. Hurricane Matthew and the lack of new issuance were largely to blame for this initial malaise.”

Hurricane Matthew stimulated some trading as the storm approached the Florida coastline, as the forecast showed a landfall was possible, and a number of exposed cat bond positions responded with prices declining.

“For much of early October the market was on hold watching Hurricane Matthews path however we did than see some limited trading on select names pre and post landfall,” Bonder continued.

Things picked up once the primary cat bond issuance market sprung back to life, with USAA’s latest Residential Re 2016-2 cat bond giving ILS fund managers and investors something to focus their minds on portfolio adjustments again.

“On the new issuance front the market was forced to wait nearly all month before a deal was even announced let alone any issued,” Bonder commented. “And we don’t think it was a coincidence that the secondary market finally saw some break thru upon this announcement.”

Zurich headquartered ILS and catastrophe bond investment manager Plenum Investments said that outside of the pressure on some prices due to hurricane Matthew in October, some of which was not fully recovered, upward momentum largely remains on secondary marks.

This upward price movement is likely to continue into November, although at a lesser pace as we move into the last accepted month of the Atlantic hurricane season.

“Demand for CAT bonds continues to be high and as November is usually also a month with limited issuance activity, the upward pressure on CAT bonds prices persists,” Plenum Investments said.

With two more new cat bond issues launching at the beginning of November, the Bonanza Re and Ursa Re transactions, the need for ILS funds and investors to find diversification as they adjust portfolios to accept new issues, will likely continue and perhaps accelerate into the end of the year.

That could result in an active couple of months in the secondary cat bond market, especially if issuance can maintain volumes seen in the final quarter of recent years.

Bonder said; “We look forward to the final two months of the year when this trading momentum could very well be sustained.”

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Also read:

– Cat bond trading activity increased in September as seasonality peaked.

– Cat bond investor demand continues in August, with some sellers seen.

– Cat bond investor demand & trading strong in July, prices rise further.