Catastrophe bonds proved their value as a resilient diversifier as Trump tariff turmoil roiled global markets, according to a report by Bloomberg citing Fermat Capital Management, a hedge fund focused on insurance-linked securities (ILS).
While equities and even traditional safe havens like Treasuries stumbled, cat bonds continued to post steady gains – highlighting their uncorrelated appeal for hedge funds and institutional allocators.
According to Fermat the catastrophe bond market remained “orderly,” with investors “seeing the benefit” of the asset class during this period of turbulence.
Over the past 12 months, cat bonds have returned approximately 13%, significantly outperforming both US Treasuries (up 5%) and the S&P 500 (down 5%), according to data from the Swiss Re Global Cat Bond Performance Index. Year-to-date, cat bonds are up around 1%, compared to a 15% drop in the S&P 500, underscoring their resilience as EU and Chinese retaliation against US tariffs intensifies pressure on global equity markets.
With over $50bn in outstanding issuance, the catastrophe bond market is attracting increased interest from hedge funds seeking non-correlated returns. Issuance hit a record high last year, driven by rising demand from insurers and reinsurers looking to transfer climate-related risks—such as hurricanes and wildfires—to capital markets.
“Cat bonds don’t trade with equity or credit markets,” noted Fermat. “They are a pure play on natural catastrophe risk, which is why they continue to act as a shock absorber in diversified portfolios.”
Other ILS-focused managers, including Plenum Investments and Icosa Investments AG, echoed that sentiment. In a recent investor note, Plenum said cat bonds are once again “demonstrating their stabilising effect” – as they did during the 2008 financial crisis, the Covid market shock, and the rate volatility of 2022.
Because cat bonds pay a risk premium over the US Treasury rate, they may continue to benefit in an inflationary environment, particularly if interest rates remain elevated. Trump’s trade measures are widely expected to exert upward pressure on inflation, potentially reinforcing the relative attractiveness of cat bonds.
Plenum added that, barring any qualifying catastrophe events, investors “can continue to expect attractive returns” from the asset class.
