Cat bond fund performance likely to remain elevated: Plenum

Plenum Investments maintains its “higher for longer” outlook for catastrophe bond investment returns, saying that even though cat bond risk spreads may have dropped since their peak, this is still an attractive point to enter the market and fixed income investors should seriously consider the asset class.

Catastrophe bond market returns remain on track to set a significant record in 2023 and cat bond funds have already delivered over 11% year-to-date.

Specialist investment manager Plenum Investments believes the performance will continue at similarly high-levels, as reinsurance premiums remain elevated and the floating-rate return that cat bond investments benefit from is also substantial at this time.

“Given the 22-year high in the floating base rate of CAT Bonds and a continued hard reinsurance market, performance is likely to remain at this elevated level,” Plenum explained.

Going on to explain the floating-rate benefit, alongside other reinsurance market specific factors.

“These securities generate the variable base interest rate of currently 5.4% which is the highest level since 2001. In addition, reinsurance rates remain at an elevated level. This year’s tornado and other natural catastrophe losses and adjustments to risk models continue to drive reinsurance premiums.

“Hence, we maintain our “Higher for longer” expectation,” the asset manager stated.

With gross yields of around 13.5%, cat bond investors are maintaining their allocations to the space, Plenum says.

But notes that while risk spreads may have dropped from their peak, “For those investors who missed the opportunity to enter CAT bonds, the CAT bond market still offers a very good entry point.”

Catastrophe bonds have once again demonstrated their relative lack of correlation to the broader financial markets, while the increased returns possible are now set to compensate investors even when major catastrophes do occur, Plenum believes.

The asset manager explained, “The CAT bond market return YTD would approximately compensate a potential major loss in the reinsurance market such as e.g. the equivalent of the 1906 earthquake in San Francisco or a category 5 hurricane in Miami.”

Adding, “Against the backdrop of challenging and volatile traditional fixed market conditions and historically high CAT bond coupons, fixed income investors will seriously need to consider CAT bonds.”