Catastrophe Bonds on the Menu — High Income Until the Storm Hits

Taco Tuesday #12

You check your portfolio and one of your bonds has stopped behaving like a bond.

Not because of earnings. Not because of the Federal Reserve. Not because of inflation. Because a hurricane crossed a predetermined location at a specified intensity during a defined coverage period.

Welcome to the cat bond kitchen, where Wall Street meets the weather and insurance risk enters the capital markets.

In this Taco Tuesday episode of the Unbearably Bullish Podcast, Donald Johns breaks down how catastrophe bonds work, why the potential income can look attractive, and why the trigger matters more than the coupon.

Financial engineering can transfer risk. It cannot repeal it.

In This Episode

• What a catastrophe (CAT) bond is and the problem it is designed to address
• The five ingredients: sponsor, special purpose vehicle, investors, collateral account and risk premium
• The trigger menu: indemnity, industry loss, parametric and modeled loss triggers
• Basis risk and why a storm alone does not decide whether investors lose money
• Why a higher coupon is the market's price for uncertainty, not a gift
• The Bull's case, 🐻 the Bear's case, and 🔍 the Bond Vigilante reading the contract
• The Cat Bond Risk Radar: seven questions to ask before putting one on your plate
• This week's Taco Tuesday Challenge

The coupon tells you what you might earn. The trigger tells you what you could lose.

The sky can be calm, the forecast can be clear, and the storm can still be inside the contract.