(Bloomberg News) Returns on catastrophe bonds are exceeding those on corporate debt by the most in nine months as investors facing record-low yields chase returns detached from economic performance.
The bonds, designed to protect insurers from payouts on natural disasters such as hurricanes, have gained 1 percent this month, compared with a loss of 0.9 percent for company debt, according to the Swiss Re Cat Bond Total Return index and Bank of America Merrill Lynch data. Returns on dollar-denominated cat bonds were half those of corporates in 2011 as an earthquake and nuclear accident in Japan sparked record losses.
Issuance in the $15 billion market for catastrophe bonds is growing at the fastest pace in five years as investors seek securities that don't depend on payrolls growth in the U.S. or a solution to Europe's sovereign-debt crisis. An average yield of about 9 percentage points more than short-term lending rates compares with 5.89 percentage points on junk bonds in the U.S.
"It's not related to how the U.S. economy is doing, to how the global economy is doing, the concerns about growth, currencies or deficits," Shiv Kumar, a managing director and head of financial institution structured finance at Goldman Sachs Group Inc., said in a telephone interview from New York. "The sector itself has proven to be a diversifying, objective, clean play compared with debt and equity markets."
Hurricane Season
While insurers are boosting yields on cat bonds by selling riskier debt as the U.S. hurricane season progresses, chances of a major storm lasts every year through November, according to the National Hurricane Center. That means higher coupons and investor demand is accounting for accelerating returns, according to Fermat Capital Management LLC's John Seo.
"The proven track record, especially through recent broader market volatility, has also helped establish the credibility of cat bonds," Seo, managing principal at the Westport, Connecticut-based firm overseeing $3 billion of the debt, said in an e-mail.
Elsewhere in credit markets, the cost of protecting European company debt from default fell for a second day, reaching the lowest in five months. Banco Santander SA, Spain's biggest bank, and France's Societe Generale SA raised money as issuance in Europe's corporate bond market continued to defy the usual summer slowdown.
Europe Risk
The Markit iTraxx Crossover Index of credit-default swaps tied to 50 mostly junk-rated European companies fell five basis points to 563, the lowest since March 20, according to prices compiled by Bloomberg.
In the U.S., the Markit CDX North America Investment Grade Index dropped 1.2 basis point yesterday to a mid-price of 98.5, the lowest since May 3.