(Bloomberg) — A bond market designed around natural catastrophes is proving remarkably resilient to a man-made market meltdown.
While most markets have seen deep selloffs since Donald Trump’s “Liberation Day” tariff announcement, investors in catastrophe bonds have sailed through with hardly a ripple.
Fermat Capital Management, a Connecticut-based hedge fund specialized in insurance-linked securities, says the market for catastrophe bonds “has been trading in an orderly fashion” and investors who bought them “are seeing the benefit.”
The outperformance by cat bonds comes even as markets traditionally treated as havens get dragged down by the panic triggered by Trump’s tariffs.
Over the past year, catastrophe bonds have gained about 13%, compared with a 5% increase in a Bloomberg index of US Treasury bonds and a 5% drop in the S&P 500 Index. So far this year, catastrophe bonds have added about 1%, according to the Swiss Re Global Cat Bond Performance Index, while the S&P 500 is down roughly 15%. On Wednesday, European stocks sank to their lowest since January 2024 as the EU and China retaliated against Trump’s tariffs.
Fermat is among a small but growing group of specialist investors focused on the $50 billion cat-bond market, where modeling catastrophes such as hurricanes determines returns. Insurers and reinsurers issue cat bonds to pass on the risks associated with natural disasters to the capital markets. Investors have to pay out if a predefined catastrophe occurs, but can reap huge rewards if it doesn’t.
Issuance of cat bonds rose to a record last year, as climate-fueled weather disasters intensify and increased urbanization leaves more property exposed to losses.
The bonds tend not to move in tandem with other markets, which is why they’re often used as a diversification tool by investors willing to take on the unique risk they represent.
Fermat isn’t the only investment manager seizing on the current moment to draw clients’ attention to the relative gains of cat bonds compared to other asset classes. In an update on LinkedIn, Icosa Investments AG said cat bonds continued to enjoy “a calm and stable environment” even as other markets have tanked.
Catastrophe bonds are made up of two components: a risk premium plus the US Treasury rate. Plenum Investments, which runs two catastrophe bond funds, says that because Trump’s tariff policies are generally considered inflationary, it expects the Treasury rate to “stay elevated” over the medium term.
Overall, cat bonds are likely to remain unaffected by tariff-related market disruptions, according to Plenum.
