Performance turnaround for convertible bonds

May 11, 2022

Market conditions have been tough for convertibles, but April’s performance suggests that technical factors have adjusted in their favour.

After a challenging start to 2022, convertible bonds did better in April. They matched the performance of high yield bonds and protected equity investors from the large correction.

Convertibles generally tend to do better during more volatile market conditions, although current market conditions are tough for all asset classes and sentiment remains fragile. There are, however, some positive signals that suggest to us the worst could be over.

  • April performance relative to equities was encouraging and suggests that convertible bonds’ downside protection mechanism is working again.
  • Headlines coming from Chinese authorities regarding the tech sector have turned positive, which is supportive for Chinese convertible bonds.
  • We think that the underperformance of US convertible bonds might have reached a peak in March, as shown in the chart.

US convertible bonds have displayed disappointing performance over the past few months. The chart shows that this is best explained by the equity performance of the issuers.

Historically, the equity performance of companies issuing convertibles had been close to that of the S&P 500 Index. However, since the Covid crisis, we have seen some divergence. In 2020, convertible issuers outperformed, while in recent months they underperformed meaningfully.

“We expect equity performances to converge back and the historical relationship to re-instate itself.”

We also note that convertible bonds exposed to the equity sectors that were most hit (typically high-growth sectors) have lost most of their share sensitivity and transitioned to bond-like profiles. This should protect investors should we see another leg down in this equity segment.

Equity performance of US convertible bond issuers compared to the S&P 500

Equity performance of US convertible bond issuers compared to the S&P 500 chartSource: Bloomberg indexes, BlueBay. Daily data to the end of April 2022


The past few months delivered marked relative underperformance for convertibles. We think that the technical factors that weighed on the asset class have played out and convertible bonds are now in a good spot. The medium-term argument for the asset class should come to the fore: higher rates, wider credit spreads and higher volatility have historically been a favourable environment for convertibles.

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