UPDATE—CATASTROPHE BONDS.

UPDATE—CATASTROPHE BONDS. Over four years ago I posted here on catastrophe bonds, based on an article by Michael Lewis. Catastrophe bonds are issued to cover the risk of certain natural disasters in certain areas. (You can think of the principal of the bond as likee the amount of an insurance policy and the interest that is paid on the bond as like a premium). Katy Burne has been reporting in the Wall Street Journal on the market for cat bonds. This article from just before Hurricane Irene landed described how there was a flurry in trading on cat bonds which would have been affected by hurricane damage in North Carolina. Some traders were pessimistic; others thought they were getting a bargain. This article from November 30 tells about some bondholders were expected to lose all their principal in a three year bond issued a year ago. The coverage was on severe thunderstorms, and tornadoes this year have done a lot of damage. This particular issue had an interest rate of 6.25% at a time when interest rates are very low. The return on all catastrophe bonds has been 1.4% so far this year. Last year the return for a comparable period was 9.9%. Cat bonds are risky, but they have the advantage of providing diversification.