Franklin Templeton Investment Solutions, the hedge fund-focused arm of the global asset manager, has maintained its overweight conviction on the catastrophe bond asset class, with the firm citing that while yields and spreads have compressed compared to last year, the market remains healthy, with no evidence of weakening fundamentals.
Commenting on the cat bond market’s growth in the opening quarter of 2026, Franklin Templeton said: “Catastrophe (cat) bond issuance has remained strong, with momentum carrying through the end of last year into the first quarter and likely extending into the next quarter. Existing sponsors are expected to return to refinance maturing bonds, while new sponsors continue to enter the market.
“Although yields and spreads have compressed compared to this time last year, the market remains healthy, with no evidence of weakening fundamentals.”
The firm noted that by mid-March, spreads had widened from year-end levels, which was primarily driven by seasonal technical factors rather than underlying fundamentals.
Cat bond issuance remained robust in Q1’26, after the record-breaking year seen in 2025, with a combination of new and returning sponsors accessing the market to meet capacity needs.
However, on the renewal side, approximately US$14.7 billion of catastrophe bonds are scheduled to mature in 2026, compared to US$13.7 billion in 2025, which as Franklin Templeton notes, implies roughly US$1 billion of incremental new issuance potential compared to last year’s figure.
“In addition to repeat issuers, new sponsors continue to enter the market, seeking alternative capital for risk transfer and diversification against severe natural catastrophe exposure—despite currently favorable profitability conditions in the P&C insurance sector,” Franklin Templeton added.
Looking ahead to the rest of 2026, Franklin Templeton expects the catastrophe bond market to remain active and continue to grow
“For investors, catastrophe bonds remain attractive from a diversification perspective, as returns are largely uncorrelated with broader financial markets and have been relatively resilient amid ongoing geopolitical uncertainty and elevated market volatility. We expect the catastrophe bond market to remain active and continue growing through 2026.”
Franklin Templeton’s stance on cat bonds is reflected in the firm’s conviction-focused z-score, which remains unchanged from its score in Q1 2026 at 0.9.
While a score of 0.9 still sits firmly within the overweight range (defined as +0.5 to 1.0), cat bonds alongside discretionary assets, sit below health care, which is in highest place of the manger’s conviction scores for Q2 2026.
Meanwhile, Franklin Templeton’s neutral stance on other insurance-linked securities (ILS), which includes private collateralized reinsurance, retrocession, and industry loss warranties (ILWs), remains unchanged.
As well as this, the manager’s conviction score for other ILS also remains unchanged at 0.4 for Q2 2026.
Across all ILS assets as a group (so cat bonds and then “other ILS”), Franklin Templeton’s conviction remains overweight.
Among the investor base there are many allocators who believe that even after the recent price softening the investment case for catastrophe bonds remains very strong. One key reason for this is the fact that while spreads have come down, the attachment points and core terms and conditions have not meaningfully weakened for now over three years.
Many investors still see value and risk-commensurate returns as persistent in cat bonds at this time, which should continue to fuel sufficient capital to support sponsor needs over the rest of this year.
