Cat bond fund retreat deepens in May, takes class 0.3% from peak
Pure-play cat bond investment funds lost ground for three out of four weeks in May and four of the past five weeks as the cat bond secondary market edged down following slippage on primary deals.
The past five weeks have thus taken the weekly index of bond fund pricing compiled by Plenum Investments down 0.3% from a late April peak that had capped a 73-week streak of uninterrupted weekly gains.
It likewise made May 2024 the first full month of declines since October 2022 when the market had to digest, and ultimately overstated, the threat of losses from Hurricane Ian.
Declines follow a flipping of the supply-demand scales in primary market deals during a hectic second quarter rife with issuance, Dirk Schmelzer, senior fund manager at Plenum Investments, explained for Intelligent Insurer.
“Q1 was still characterized by investor demand outpacing supply,” Schmelzer said of Q1 cat bond issuance. “Q2 reversed that.”
Difficulties first made themselves apparent on select index-triggered bonds which proved “difficult to place” and led to a secondary market correction focused on similar papers, but extending to further corners of the market, he indicated. Changes in underlying cat models have further hit sentiment, he said.
Signals from the primary market should diminish in June as issuance traditionally trails off as the hurricane season gets underway. “Presumably it calms in June,” Schmelzer said.
In the index read, Euro- and Swiss franc-denominated measures have underperformed the dollar-index on the way down, just as they consistently had on the way up. That has added up to 4.3 percentage points of underperformance since the post-Ian lows for the Euro-denominated measure and 6.75 points for the franc measure.
The array of total return performance indexes, published weekly by Plenum Investments, are built on broker quotes for a group of 15 pure-play cat bond UCITS investment funds. Sub-indexes divvy up results by currency unit class and a classification of risk profile subject to semi-annual review.
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