Regardless of some rate tightening up, following inflows of new capital, disaster bond spreads stay appealing at this time compared to corporate high yield bonds, according to hedge fund specialist manager K2 Advisors.Discussing the outlook for insurance-linked securities (ILS) financial investments in the second-quarter of the year, the hedge fund focused asset manager, which is a system of investment firm Franklin Templeton, said that it anticipates the strong catastrophe bond pipeline to continue.
In addition to a favorable outlook for catastrophe bond investing in the second-quarter of 2021, Brooks Ritchey and Robert Christian, Co-Heads of Investment Research and Management at K2 Advisors, are also positive about overall reinsurance return dynamics.
They described that, “January 1 renewal rates were positive but not as strong as expected given capital flows into the space.”
But prepare for that reinsurance rates will continue to firm, especially in the wake of current loss activity, stating, “The big United States winter season storm that primarily impacted Texas is likely to be a record event for the market. This might support greater June 1 reinsurance rates following higher January 1 pricing.”
K2 has actually noticed disaster bond spreads out decreasing a little in the first-quarter of the year, driven by hunger from investors and new capital inflows into the sector it appears.
The hedge fund focused possession manager discusses, “Although feline bond spreads have actually somewhat tightened up in the first quarter following inflows, they remain beautifully priced versus business high yield (HY).”.
The chart below shows the property managers analysis of cat bond market spreads versus high yield corporate bonds, which while clearly showing cat bond spreads out as having declined, likewise reveals that the space between the 2 asset types might be expanding.
Despite the small decrease in feline bond market spreads, the group at K2 Advisors stay positive on market momentum.
” A healthy spring feline bond pipeline is expected to provide extra trading opportunities in the 2nd quarter,” Ritchey and Christian described.
Previously this year, K2 Advisors stated that present feline bond and ILS market conditions provide an attractive point of entry for financiers, leading the hedge fund specialist supervisor to provide an obese evaluation for P&C ILS and catastrophe bonds within portfolios.
There is now some proof that spreads are decreasing in reaction to strong financier demand, on the brand-new cat bond issuance front. While secondary prices have been otherwise buoyed by demand.
So it will be fascinating to see whether that stabilises as we near the mid-year renewals, as the majority of feline bond financiers and fund supervisors will not want to see multiples at issuance decrease much further than where they are now settling.