The secondary catastrophe bond market saw further pressure on prices in May, resulting in opportunities for bond pickers during the month, as some names could be picked up at reasonable, below par pricing.
The pressure on the prices of outstanding catastrophe bonds has been evident for a number of months now and this has resulted in much of the market being priced for offers below par. In fact looking at one recent cat bond brokers price list, 60% of the 130+ tranches listed are priced below 100 currently.
The pressure began on lower yielding cat bonds, which found themselves out of favour through much of this year. Then, even with seasonality coming into play as the U.S. hurricane season approached, the market now sees many U.S. wind exposed cat bonds priced at sub-100 levels.
In the month of May the primary catastrophe bond market flowed strongly, with almost $1.48 billion of new risk capital issued. This strong issuance activity resulted in a relative amount of secondary trading, as ILS fund managers sought to balance portfolios or free up cash for reinvestment opportunities.
Additionally, ILS fund managers adjusted portfolios in advance of the U.S. hurricane season, to ensure that their portfolios are weighted correctly to a diversified pool of U.S. wind risks, again leading to some activity in the market.
The supply of bonds in both the primary and secondary market is adding pressure on secondary marks, resulting in a market that now provides opportunities for the bond pickers. ILS investors with an ability to select issuances that are priced down at the moment could find they benefit from one or two basis points of recovery in months to come.
“The downward pricing pressure remains,” commented Craig Bonder, Managing Director at AK Capital. “For a third straight month we saw continued pricing pressure on low yielding securities producing lower prints and marks.”
With 60%+ of the outstanding cat bond tranches priced below par, the pressure is spreading beyond just the low yielding notes now.
“New issue supply along with 6/1 renewals also contributed to pricing pressure and the lack of depth in liquidity at times for certain securities,” Bonder explained.
And Bonder explained that with the market positioned in such a way, bond pickers now have opportunities to profit from savvy investing.
“However not all is dire for the market. There are now more and more opportunities for investors to find value in this bond pickers market with many securities showing pricing differentiation,” he said.
Zurich-based specialist ILS and catastrophe bond investment manager Plenum Investments also commented on the secondary cat bond market conditions in May, explaining that portfolio balancing activity seemed brisk.
“Portfolio adjustments before the start of the US hurricane season created additional supply in the secondary market,” Plenum explained.
And the ILS manager also noted the ongoing pressure on secondary prices, as well as the fact that it has now presented opportunities to investors.
Explaining; “While the supply of bonds in the market put pressure on pricing and forced the downward trend of CAT bond prices to continue, it also opened up opportunities for selective bond picking.”
Plenum also noted that while pressure continues on prices, it has eased somewhat helping performance of catastrophe bond portfolios to return to more positive territory.
The ILS manager explained; “The persisting pressure on prices eased slightly, causing the performance to return into positive territory.”
Looking ahead Plenum expects seasonality to affect U.S. hurricane and named storm exposed cat bonds, which should see some price recovery in the coming weeks.
“The better performance is a reflection of the seasonal price cycle and we expect rising prices of US hurricane bond over the coming months,” Plenum explained.
It’s been a difficult year for catastrophe bond investors, particularly those who picked up many titles in the last year as some of those have lost value due to their lower yields. With the floor in pricing becoming increasingly evident in recent transactions, investors and ILS fund managers will be hoping for a little more stability in pricing and for the pressure to be removed in months to come.
Meanwhile investors with cash to deploy find themselves in a position where they can test their bond picking skills. With opportunities to profit by buying bonds priced below par to hold through the wind season, hoping to benefit from a reversal of pricing pressure as well as seasonal price rises.