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Stormy seas ahead for cat bond holders

Through June 30, $8.5 billion in catastrophe bonds were issued. By comparison, $5.7 billion and $6.8 billion were issued in the full years 2016 and 2015, respectively. Much of the appeal in these instruments comes from their low correlation to other asset classes and higher yields relative to other debt instruments.

Slow hurricane seasons in recent years drove both the demand for the bonds from investors attracted to their aforementioned yields and low durations. Institutional investors ate up a larger piece of the pie in 2017, holding 25% of outstanding issues, up from 20% in 2016. Also notable, hedge funds’ became a lesser player in the market, falling to 2% of total ownership from 6%.

How performance will shake out for the holders in the second half of 2017 is yet to be known after claims related to hurricanes Harvey and Irma are tallied. The bonds pay a coupon and an eventual repayment of principal as long as a trigger event, such as a hurricane, doesn’t occur. Should an event occur, all or some of the debt owed to the investor is forgiven.