This bond market is providing double-digit returns

investmentnews.com:

As bond markets everywhere get battered by a cocktail of higher interest rates, deficit angst and hawkish central bankers, one class of debt instrument is handing creditors double-digit returns: catastrophe bonds.

Investors in the $40 billion market for so-called cat bonds have literally been sitting out the storm to reap returns as high as 16% this year. Because of the way the bonds are structured, their coupons keep going up as Treasury yields rise, and investors get a sizable risk premium on their capital, as long as catastrophe doesn’t hit.

It’s a dynamic that’s caught the attention of a growing number of asset managers and issuers. Andy Palmer, who’s in charge of structuring cat bond deals for Swiss Re in Europe and Asia, says this year’s issuance through September climbed 27% to $10.2 billion from the same year-earlier period. He describes the mood in the market as “buoyant.”

Big reinsurers like Swiss Re and Munich Re, as well as some real-economy companies, have increasingly looked to cat bonds as they try to protect themselves from once-in-a-lifetime disasters. In July, Blackstone Inc. turned to cat bonds to shield property assets from natural-disaster losses. And Google parent Alphabet Inc. has issued them in case its California operations get hit by an earthquake. 

Asset managers, meanwhile, are lining up to get access to outsize returns. They also like the portfolio diversification that cat bonds offer, because the instruments don’t correlate with equities or other fixed-income markets. Schroders AG and GAM Investments of Switzerland run the biggest cat bond funds, according to Morningstar Inc. Credit Suisse, Amundi Asset Management and Axa Investment Managers are also active in the market.

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