How Cat Bonds Have Fared During Catastrophic Events
Cat bonds have faced a handful of default-triggering events over the years, and several have been connected with events that experienced significant losses.
But even during periods where peril events have occurred, the cat bond market has demonstrated the ability to recover rapidly in these instances, as reflected in the historical performance and drawdowns of the Swiss Re Global Cat Bond Index.
Additionally, cat bonds have exhibited durability over time—even through tumultuous market periods. We believe this attribute is due to their ability to provide diversification by way of low correlations to the financial markets.
Obviously, there is always the potential of catastrophic events that could trigger sharper drawdowns, yet even with such a possibility, we believe cat bonds can still serve as diversifiers, because different cat bonds cover different perils, which are typically uncorrelated to one another due to the nature of trigger events across geographies.
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Fixed income investing entails credit and interest rate risks. When interest rates rise, bond prices generally fall, and a fund’s share price can fall. Event-linked securities, otherwise known as Cat Bonds, are fixed income securities for which the return of principal and interest payment is contingent on the non-occurrence of a trigger event that leads to physical or economic loss. If the trigger event occurs prior to maturity, event-linked securities may lose all or a portion of their principal and additional interest. Diversification does not guarantee profit or protect against loss.
Mutual funds are subject to market risk and volatility. Shares may gain or lose value.
These views represent the opinions of the Portfolio Managers at OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.