Promoting stress within the secondary marketplace for disaster bonds seems to have resulted in report ranges of buying and selling exercise throughout the month of Might, in response to Florian Steiger, CEO of specialist cat bond funding fund supervisor Icosa Investments AG.
Given the swings in catastrophe bond spreads seen to date this yr, with tightening by way of the beginning, that changed into widening in a while provide and demand components, in addition to some hurricane season associated influences, it’s no shock that the secondary market, the place cat bond notes are traded between funds and buyers, has been busy.
The secondary market noticed very robust demand for cat bonds initially of the yr, as money from maturities and recent inflows to some cat bond funds all wanted to be put to work.
Then, as major issuance of recent disaster bonds picked up, the exercise ranges within the secondary market had been sustained, as cat bond fund managers and buyers wanted to stability their portfolios.
Later nonetheless, we noticed the correction in industry-loss index set off cat bonds, which additionally stimulated buying and selling exercise, in addition to broader unfold widening that additionally led to opportunistic trades, all at a time of elevated major cat bond issuance.
With elevated over-the-counter (OTC) buying and selling of disaster bonds and quickly adjusting costs at instances, it’s made for a dynamic secondary market setting in 2024 to date.
Steiger, CEO of Icosa Investments AG, famous that, “Transaction exercise within the secondary market has noticeably improved lately, resulting in a considerably higher liquidity scenario for buyers.”
Liquidity is essential, because it’s a selling-point for disaster bonds, with these property tradable, at a worth, on any day, that means buyers and portfolio managers will be tactical and handle their funds or allocations actively.
Steiger defined that, in H1 2024, “Within the secondary market, based mostly on our estimates, report volumes have additionally been traded this yr, considerably enhancing the liquidity of this asset class.”
In truth, the cat bond fund supervisor’s CEO estimates that Might may have been the busiest month ever for disaster bond buying and selling within the secondary market.
“Based mostly on our estimates, secondary market buying and selling reached a brand new report stage within the second quarter. April 2024 was probably essentially the most energetic month of all time till Might 2024 surpassed it,” Steiger defined.
Commenting on secondary market buying and selling exercise in latest months, Steiger additionally stated, “Notably, the share of index-linked cat bonds that modified palms was considerably bigger in comparison with new issuances.
“The worth decline described by us, and the related unfold will increase, weren’t simply paper losses however occurred in precise buying and selling.
“Parametric cat bonds, most of that are issued by the World Financial institution, had been hardly current within the secondary market.
“In April and Might, transaction costs had been notably notable. Many transactions befell (typically considerably) under the bid indications utilized by brokers for fund valuations, indicating substantial promoting stress amongst some market members.”
It is very important be aware that figuring out cross-trades within the cat bond market, the place fund managers are buying and selling by way of a broking desk between two of their methods, generally is a problem and this makes monitoring precise volumes between totally different buyers or managers harder.
The cat bond fund supervisor’s CEO went on to state, “Our proprietary Icosa Indicator for investor curiosity within the secondary market additionally exhibits that the market was in strongly oversold territory within the second quarter.
“For market members with capital inflows, this was, after all, a welcome alternative to take a position this capital very cheaply.”
Icosa Investments estimates secondary market cat bond buying and selling volumes utilizing a proprietary methodology based mostly on date filed with Hint and its personal estimates from trades and buying and selling combine.
Based mostly on this, Icosa believes the beginning of this yr has seen record-levels of exercise, together with the largest cat bond secondary market months ever.
The corporate additionally appears to be like at investor sentiment within the secondary cat bond market, based mostly on buying and selling and worth, in addition to its personal expertise and so defines intervals when the market is overbought or oversold, which is a wonderful solution to supply further inputs to tell its buying and selling methods.
