What Are The Risks In Pandemic Bonds? | Money Mind | Bond Markets
Holders of “pandemic bonds” risk losing all their money
World Bank-issued pandemic bonds hit the spotlight as coronavirus outbreak continues to spread globally.
These securities were released in 2017, and are intended to disburse funds to countries that need help to contain the pandemic.. WHO earlier this month classified the current outbreak of COVID-19 as a global pandemic.
Bonds offer investors high interest payments in exchange for accepting the risk of losing a certain amount or all of their money at once..
However, the prices of these bonds have fallen as investors pursue cautious strategies amid increasing numbers of infections.. Growing fear of the economic fallout from the coronavirus has led to a sell-off of risky assets as market participants seek to secure their assets, for example, by buying Treasury government bonds USA.
According to rating agency DBRS Morningstar, investors who hold pandemic bonds could soon lose all of their principal, or about 80% of the value..
Less risky bond prices could plunge 50%, said Marcos Alvarez, senior vice president and head of insurance global financial institutions at DBRS Morningstar..
«Investors can lose their capital assets if certain set of triggers are met, such as the size of the outbreak, the rate of growth and the spread of the disease across country borders», – he notes.
The outbreak should last at least 12 weeks and have more than 2,500 deaths, according to the World Bank.
When all of these conditions are met, it results in payments to individual countries in need of disaster containment assistance and investors lose some or all of their money.. On March 24, the 12-week milestone will be crossed.
According to the latest WHO data, there are at least more 200,000 infections and 8,000 deaths.
In other words, pandemic bonds are catastrophic-tied debt designed to raise money from issuers in the event of natural disasters..
Investors usually buy such securities because they offer much higher yields than other fixed income products. They are also not tied to the usual stock market metrics. — but instead are bound to global events — and therefore offer portfolios of investors some diversification.
Buyers of these bonds include French asset management firm Amundi and Britain’s Baillie Gifford.. According to DBRS Morningstar, the bonds are also owned by some pension funds. Investors are mainly based in the USA and Europe.
Despite the stated parameters, experts say it is not easy to determine when a pandemic could trigger a payout.. And even if it does, it may be too late for countries in need of assistance..
«As with other cactastraphic event bonds, defining parametric triggers is challenging, and IBRD Pandemic bonds are no exception.”, – said DBRS Morningstar.