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Catastrophe Bonds Reach Highest Level Since Japan Earthquake

Demand for bonds designed to protect insurers from payouts on natural disasters is increasing, with an index tracking the debt at the highest level since prices plummeted in March 2011 after Japan’s earthquake.

Catastrophe bonds returned 0.33 percent last week, boosting the Swiss Re Cat Bond Price Return Index to 94.12, the highest in 18 months. The gauge, which tracks the debt sold by insurers and reinsurers and bought by investors who lose money if they’re triggered, tumbled to 93 in the month following Japan’s temblor on March 11, 2011. The measure fell to 90.8 in May.

Demand for the debt is increasing as investors chase returns linked to the probability of events such as hurricanes while facing record-low yields in speculative-grade corporate debt. An average yield of about 9.4 percentage points more than short-term lending rates for dollar-denominated cat bonds this year compares with a 5.42 percentage-point spread on junk bonds, according to data compiled by Bloomberg and Bank of America Merrill Lynch index data.

“People want yield, and that’s where you get yield,” Bill Keogh, president of catastrophe risk modeler Eqecat Inc., said Sept. 19 at a conference in New York. “I don’t know where else you could get yield these days.”

The 2012 hurricane season continues to be “mostly benign” for insurers, with Hurricane Isaac the only storm to make U.S. landfall and cause notable losses, JPMorgan Chase & Co. analysts Arun Kumar and Brett Gibson wrote in a Sept. 10 report.

To contact the reporter on this story: Charles Mead in New York at cmead11@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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