Amid the turmoil prompted by President Donald Trump’s slew of tariffs, at least one asset class survived the meltdown.
Catastrophe bonds, or cat bonds, function as a form of reinsurance contract to provide coverage against natural disasters like hurricanes and earthquakes. The bonds have withstood the chaos that has ravaged most other securities.
The Swiss Re Cat Bond Index was up 28 basis points (0.28%) from April 1 through April 11, while the S&P 500 index dropped 4.7%, the Bloomberg U.S. Corporate High Yield Bond index slipped 2.5% and the broader The Bloomberg US Aggregate Bond Index fell 2%.
Len Zaccagnino, vice president on the Swiss Re Capital Markets insurance-linked securities sales team, said the Swiss Re Global Cat Bond Index Total Return has performed well this year even with the Los Angeles wildfires and a severe convective storm season in the U.S. “negatively impacting mark-to-market values for bonds exposed to those events. Largely, the contribution of those perils to the overall market remain low compared to the core peril of U.S. hurricanes.”
Florian Steiger, CEO of Icosa Investments, a Switzerland-based firm and subdistributor/initiator of the Icosa cat bond strategy, which has about $430 million in assets, said cat bonds have performed well largely due to their insulation from economic and geopolitical risks.
“Their returns are primarily driven by natural catastrophe events, mainly hurricanes and earthquakes, rather than broader macroeconomic conditions,” he said. “As long as such events don’t occur, there's little fundamental reason for cat bonds to be affected by geopolitical volatility.”
In 2024, cat bonds saw record inflows of $17.7 billion.
Steiger of Icosa also noted that cat bonds tend to hold up well when other asset classes experience turbulence.
Another Switzerland-based investment firm, Plenum Investments, which has four cat bonds totaling $1.1 billion in assets, told shareholders in a recent letter the bonds currently demonstrate a stabilizing effect in portfolios, just as they did during the financial crisis, the COVID-19 pandemic, and the interest rate turmoil of 2022.
For example, between Jan. 4, 2008, and Dec. 31, 2009, during much of the global financial crisis, the Swiss Re Cat Bond Total Return Index delivered a return of 16.45% while the S&P 500 index plunged 21.01%.
Cat bonds are “expected to remain largely unaffected by the current disruptions related to the trade conflict,” Plenum added. The resilience stems from the fact that cat bonds replace traditional credit risk with natural catastrophe risk and are typically structured as floating-rate instruments.
Other impacts
However, Plenum also said in the letter that since Trump’s policies are generally considered inflationary, there could be some other impacts on cat bonds.
“First, the T-bill component of cat bond returns (the coupon/rate) should stay elevated over the medium term, with the current 4% level acting as a baseline,” the Zurich-based firm said. “Second, over the medium term, rising inflation will support higher reinsurance rates to reflect higher nominal insured values, a trend already observed in 2022.”
A spokesperson for Plenum explained that the Treasury bill is the collateral of the cat bond.
“The invested capital is parked there during the duration of the cat bond and stays ready in the case of a loss to be covered,” the spokesperson added.
Steiger of Icosa explained that cat bonds typically use T-bills (or Treasury money market funds) as collateral to back the bond's principal, which is held in a trust account to minimize credit risk.
“This structure ensures investors’ funds are protected by low-risk government securities while earning returns from both T-bill interest and catastrophe risk premium, which together form the coupon,” he said. “This way, exposure to the ceding company can be reduced as the principal does not sit on the balance sheet of the company sponsoring the cat bond but is instead parked in T-Bills.”
Nonetheless, the cat bond market is indirectly affected, Plenum assured.
“If traditional asset classes undergo broad repricing, the relative stability of cat bonds may lead to an increased portfolio weighting. As a result, we may see moderate outflows from the cat bond market.” But this dynamic might actually impart a positive effect: reduced demand for cat bonds leads to a lower supply of insurance coverage, which in turn helps stabilize reinsurance yields, Plenum added in the note to shareholders. Plenum manages a total of $1.5 billion in assets.
Rick Pagnani, CEO and cofounder of King Ridge Capital Advisors, which manages the world’s first ETF that invests in catastrophe bonds, the Brookmont Catastrophic Bond ETF, said while cat bonds are not immune to risk, they have been stable since they play by different rules.
“Their payouts depend on actual events, earthquakes, hurricanes, not inflation prints or Fed comments,” he said. “That makes them structurally uncorrelated to most of the portfolio.”
What is also helping the asset class has been a stretch of relatively quiet catastrophe activity.
“Last year and so far this year, we haven’t seen the kinds of major events that trigger losses,” Pagnani said. “Of course, that can change quickly, (as) hurricane season starts in June, but right now, performance has been steady, and the technical backdrop is solid.”
Cat bonds bring something unique to the table, he added, “exposure to risks that are genuinely outside the economic cycle.”
The Brookmont ETF, which was launched on April 1 and trades under ticker ILS, now has about $6 million in assets.
CAT bonds are a niche, specialized space in the wider global bond market, with very sophisticated institutional players such as international insurance companies, said Jwala Rambarran, senior adviser, office of the managing director at the CVF-V20 Secretariat.
“The impact of Trump’s tariff policies was more on global equity markets, especially U.S. companies with significant supply chains to emerging markets such as China on which very high tariffs were placed,” he said. “Bond markets were relatively less affected than equity markets, particularly the niche CAT bond market which remains very risky but rewards investors very well for taking such risk.”
The CVF-V20 is an independent intergovernmental group based in Accra, Ghana, which represent countries that are more vulnerable to climate change.
