Catastrophe, or "CAT" bonds can add diversification to your income portfolio, and right now they offer the opportunity for strong price appreciation in addition to income.
As you can see from this index, below, CAT bonds sold off a lot ahead of Hurricane Irma. While the full extent of the damage isn't yet known, preliminary news flow is positive.
Swiss Re Cat Bond Price Return Index
That should help these bonds rebound quickly. There may be some losses in some individual securities but as a whole I think the market weathered the storm very well.
If no other storms hit, you could even get full recovery.
What is also important is how many asset managers were watching this market closely as the impact of back-to-back hurricanes Harvey and Irma would test the diversification and seniority level of CAT bonds. Since they have done well, expect new institutional money to be funneled into the market.
At the same time, it is normal for insurance premiums to rise after large losses like those experienced this year. That should enhance cash flow going forward.
You need to work with an expert on CAT bonds, and I'd only use a fund -- not individual bonds -- for this asset class. There are managers like Stone Ridge and AQR and others that can offer exposure to this somewhat obscure but useful part of the income market.
Right now I like the diversification. While not a fan of how opaque this market is, I like this entry point.
This commentary was originally sent to subscribers of Income Seeker on Sept. 13. Click here to learn more about Income Seeker and subscribe to this product.