Cat bond spread
The risk compensation paid to catastrophe note holders, on top of the collateral's own yield.
Between early 2022 and summer 2023, US short-term rates went from close to zero to above 5%. Cat bond coupons rose by as much, with the price of catastrophe risk playing no part: the collateral sits in Treasuries or money market funds, and its yield is added to the spread. The spread is the other half of the coupon, the part that pays for insurance risk. Reading the market off the total coupon means seeing a hardening when only rates moved, and the mix-up comes back in market commentary with every rate cycle. The spread is compared to expected loss through the multiple. Its level reflects the balance between available capital and risk on offer, model uncertainty, the bond's liquidity and its term. At equal expected loss, a peak peril or an indemnity structure, slower to settle, costs more: the spread also pays for opacity and capital lock-up, not only for probability.
A note issued in 2026 pays a total coupon of 8.7 percent, made of 3.1 percent collateral yield and 5.6 percent risk spread, for an expected loss of 1.45 percent, a multiple of 3.9. The following year short rates fall 120 basis points and the spread is unchanged: the headline coupon drops to 7.5 percent while the price of risk has not moved one basis point.
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