3 months ago
5
The overall yield of the catastrophe bond market rose as the market repriced in the wake of recent hurricane Milton, but like other market indices and the performance of cat bond funds themselves, the effect of the storm has been quickly overtaken by continued positive market momentum.
In recent months the catastrophe bond market yield has been showing typical seasonal traits associated with the peak of the Atlantic hurricane season.
As is typical when seasonality from the wind season affects cat bond market yields, the overall yield had declined through August and September, a trend that typically continues through October although slowing somewhat as peak-season passes.
In October, hurricane Milton made landfall in Florida and, as we’ve documented, moved the prices of some outstanding cat bonds, resulting in the Swiss Re cat bond index falling at first (since having recovered somewhat and risen higher from that decline).
This movement was reflected in catastrophe bond market yields, resulting in a rise in insurance risk spreads on that secondary market repricing of certain positions.
But the effect was relatively short-lived in this case, as the cat bond market yield soon fell back into a more typical pattern before the last pricing of the month.
By October 25th the cat bond market yield sat at a still historically healthy level of 11.18%, very slightly higher than the 11.15% where it ended September (click the image below for our interactive chart).
This catastrophe bond market yield data has been collated with the assistance of our kind partner Plenum Investments AG, a specialist insurance-linked securities (ILS) investment manager.
After the end of September pricing, where the cat bond market yield stood at 11.15%, the following week saw a further decline on expected seasonality to 11.01%.
Then hurricane Milton made landfall on October 9th and at the next pricing of this cat bond market yield index (on October 11th) it rose to 11.70%, an increase of just over 6%.
But, as the market reset its prices again the following Friday, the cat bond market yield reduced slightly to 11.47%, then declined again to 11.18% at October 25th as expected seasonal trends kicked-in once more.
As a reminder, bond yields declining are not a direct signal of lower returns being ahead. Price and yield are inverse and hurricane seasonality pushes cat bond prices higher (tightening spreads), resulting in a reduction in the observable market yield.
As this hurricane seasonality peters out, typically through October and into November as the Atlantic hurricane season draws to a close, the yield typically starts recovering as prices fall back once again.
Hence, the rise in the cat bond market yield after hurricane Milton’s landfall reflected the marking down of prices of certain catastrophe bonds thought potentially exposed to the storm and the return to a declining trend reflected both the recovery of some of the price decline seen from Milton, as well as the return to typical seasonal trend for the time of year.
While there remains some uncertainty over the true cat bond exposure to hurricane Milton and any actual losses will take time to be realised, it’s clear once again that the market absorbed the mark-to-market impact of the storm in a relatively short time.
Analyse catastrophe bond market yields over time using this chart.
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