Trading activity and pricing in the secondary market for catastrophe bonds was mixed in February, as a reasonable balance of trading helped the market avoid feeling over bought or sold, while issuance levels didn’t force too much investor portfolio activity.
So far in 2016 the secondary catastrophe bond trading market has been relatively balanced, with January seeing “equilibrium” in terms of trading volumes resulting in more stable cat bond prices. February appears to have followed suit, with perhaps a little less activity but still a relatively balanced mix of demand and supply.
Primary issuance of cat bonds remained relatively brisk in January, with two transactions completing during the month bringing $550m of risk capital to market and three other deals launching.
However cat bond issuance activity is unlikely to break any records this quarter and as a result we haven’t seen the demand for diversification and portfolio rebalancing driving pricing, as was seen in previous years first-quarters.
Craig Bonder, Managing Director at AK Capital explained; “Another fairly mixed month for February in terms of trading volumes and overall price direction. As the month ebbed and flowed it seemed the market never quite felt over bought or oversold as is the case at times. With even flows and a handful of new issuances we saw a good trading balance throughout.”
Whether this price stabilisation is an evolution of the market, in terms of reaching a size where by there is sufficient secondary paper and traders available to enable more demand to be met, or simply a function of a slower, more steady issuance pattern, we’ll have to wait and see as the year progresses.
Zurich, Switzerland based catastrophe bond and ILS fund manager Plenum Investments, stated; “The secondary market activity was mixed in February as only a handful of new issuances came to market and consequently no major rebalancing effort was needed from investors.”
Along with the trading ebb and flow noticed, the price direction of secondary cat bonds was also more stable. Plenum Investments explained; “Also mixed were market price movements, as no clear price direction was noticeable during the month, with the exception of US hurricane positions, which were seasonally down by 50 basis points on average.”
The ILS market has not yet had an opportunity to put significant amounts of investor capital to work in new cat bonds in 2016. It will be interesting to see how secondary market pricing reacts to a bumper month, which we could see in the run-up to the mid-year renewals as U.S. wind bonds come to market.
Investment managers are mostly expecting an active pipeline of new U.S. wind catastrophe bonds as June approaches, with March already half-way through we could see a number of deals in April and May resulting in greater opportunities to deploy new capital for managers.