The seasonality results of the height of the US hurricane season approaching accelerated a decline in the overall yield of the catastrophe bond market in August, though it nonetheless ended the month at a really beneficial 12.52%.
US hurricane danger seasonality is a key driver of yield spreads in disaster bonds, with the market usually seen to expertise unfold compression as the height of the hurricane season approaches, then get better some floor because the season winds down.
After we final reported on the catastrophe bond market yield, we mentioned that seasonality had begun to point out itself in July.
The cat bond market yield slid barely within the month, however nonetheless ended July at a nonetheless traditionally very excessive 13.54%.
One month later and the general yield of the cat bond market has declined by 7.5%, dropping to 12.52%.
A 12 months in the past, the general yield of the disaster bond market on the finish of August 2023 sat at 13.56%. However on the similar level in 2022 it was simply over 10.1%, whereas in 2021 cat bond market yields sat at simply 5.51%.
Which drives house the improved alternative to spend money on disaster bonds and because the latest decline is essentially seasonal unfold actions, at the very least a few of this shall be recovered as the height of hurricane season passes and danger is considered to be lowering as we transfer in direction of the top of the season.
Insurance coverage danger spreads have declined from 8.24% on the finish of July to now 7.4%, which is the one element of cat bond market yields that’s affected by danger seasonality.
One different notable level is a slight decline seen within the risk-free price, so the collateral yield.
The collateral yield of the cat bond market sat at 5.3% on the finish of July, however has now declined to five.12%. With a price tightening cycle anticipated for the US Treasury, it will likely be fascinating to look at how the contribution comes down over time.
It’s price noting although that the way in which rate of interest tightening impacts collateral yields is usually not even and there could be a lag as effectively, which might make disaster bonds a useful asset class the place greater risk-free charges may be skilled for longer.
As we reported final week, catastrophe bonds funds had a very good August with 2% plus monthly returns in a number of cases.
Over the trailing 12-months, to August thirtieth 2024, the common return of cat bond funds within the UCITS construction was 12.40%, so nonetheless very comparable with market yields.
Robust returns are anticipated to proceed via September, with one other 2%+ month once more potential for some cat bond funds, helped by the seasonal actions.
Seasonality results will proceed, with the market yield more likely to decline additional over the remainder of peak US hurricane season.
Analyse catastrophe bond market yields over time using this chart.