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Q1 2013 Update On The CAT Bond Market

The Swiss Re Global CAT bond index is up 3.2% year to date. This index is the most commonly used index for tracking the CAT bond market. It tracks the total return of all USD and EUR denominated CAT bonds, whilst hedging out the EUR currency risk.

This is behind the performance of other more well known asset classes like equities, and corporate bonds, but ahead of others like commodities (down 3% YTD)

Investors should not be surprised to hear little news about the CAT bond market until later in the year when the hurricane season in the US starts.

The main news stories about the CAT bond / reinsurance market revolve around issuance of new CAT bonds.

2012 saw new issuance hit levels not seen since 2007. During the first quarter of 2013, $670m worth of CAT bonds came to market. The total size of the CAT bond market now stands at roughly $16.5 billion.

As mentioned in previous blog posts, the CAT bond market is but a fraction of the wider insurance-linked-securities (ILS) market which is estimated to be $505 billion in size.

There are a few signs that increased demand for CAT bonds are starting to affect pricing, for examples bonds initially priced with a coupon of 9-10% going off at 8.5% due to the level of demand from investors.

Given the strength of other asset classes, the expected returns still look relatively reasonable. For example the Barcap Global Corporate index now has a yield to maturity of only 2.5%.

The real advantage of this asset class, still remains its low correlation to other asset classes though

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.