Hurricanes Could Have a Major Impact on This Bond Market

Hurricane Helene and Hurricane Milton have wreaked havoc on the communities in their path. Insurance claims are expected to be in the billions, and many families are finding themselves displaced.

A safe distance away from the destruction and disruption, a particular niche of the bond market could also feel the impact of the storms.

What Are Cat Bonds?

Catastrophe bonds — also called “cat bonds” — enable insurers to transfer disaster risks to investors. Investors who buy these types of bonds are essentially betting that a catastrophic event won’t occur, or cause as much damage as expected. These special bonds are for the most part not correlated with the broader market, and they have historically yielded big returns for investors (not least because there is substantial risk attached). But as extreme weather events intensify in scale and frequency, cat bonds are becoming an increasingly risky bet.

In 2022, hurricane Ian caused roughly $60 billion in insured losses in 2022. That made it the biggest loss event of the year — and a catalyst for a slump in the cat bond market.

Hurricane Helene has already caused up to $14 billion in losses, per estimates from Moody’s RMS cited by Bloomberg. Damage from hurricane Milton is expected to be even greater, with estimates ranging from $40 billion to as high as $175 billion in insured losses, according to reporting by CNBC.

Balancing Risk

If the worst-case projections hold, Hurricane Milton has the potential to reshape the catastrophe bond market. This led some investors to sell bonds at a discount ahead of the storm, according to Bloomberg.

The weather is notoriously unpredictable, and that feels more true with each new extreme weather event. Against that backdrop, catastrophe bonds seem to be a particularly risky endeavor, highlighting the importance of understanding risk and diversification when investing.

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