The new year and a new US government have not fundamentally altered our macroeconomic perspective — that the climate remains positive for risk-on bonds such as convertibles.
As we pointed out in our latest Bond Compass, 2024’s economic backdrop was likely to endure into 2025. For fixed income investors, this implies continued opportunities in some of the bullish investment strategies that performed well last year, such as high yield and convertible bonds. So far this year, volatility generated by political uncertainty has added to the complexity of asset allocation decisions —but faith in convertibles has been rewarded.
Global convertible bonds started 2025 on stronger footing, after a challenging December. The FTSE Qualified Global Convertible Index returned 2.65%, a favourable return compared with the Bloomberg Global Aggregate Index’s 0.57% return. This was despite the fragility shock to broader tech in late January from China-based AI startup DeepSeek, which impacted chipmakers and AI platforms on concerns over competition. Treasury yields also went on a roller coaster ride, as inflation expectations and tariff threats blew hot and cold. Through that uncertainty, convertible bonds remained relatively protected, because of their relatively lower interest rate sensitivity.
Consumer discretionary, industrials and materials were the best performing convertible bond sectors. Strong performers included German industrial company Rheinmetall AG, up more than 21%, and Alibaba’s large bond, which contributed to 0.2% of the month’s overall index performance. ON Semiconductor was the most negative contributor to the index (-0.08%). It lost 8% but has a weight of close to 1%.1
New issuance started 2025 weakly, with circa $3.2bn of paper printed, while MicroStrategy bucked the trend with a $730mn perpetual strike preferred issuance. As per the previous five 5 issues in 2024 will be devoted to general corporate purposes and buying more Bitcoin.2 Note that this bond will not be part of the FTSE Qualified Global Convertible Bond index as it is a preferred and is a perpetual.
We believe convertible bond performance will be shaped by a potential broadening of equity market performance, which we started to see in January. Small cap earnings is a key data point to watch. Small- and mid-cap names make up circa 50% of the global convertible bond universe and growth, crypto, and tech names are not immune from a potential further rise in Treasury bond yields. However, converts bring a different flavour of convexity into portfolios and can help enhance fixed income portfolio returns.
Despite the postponement of US tariffs on Mexico and Canada, there remains a risk of a broader trade war. US-based convertible bond issuers appear to be less exposed to tariffs, but not immune. That said, US convertible bond issuers tend to generate a greater slice of revenues domestically than many of their larger peers. Just 26% of revenues come from non-US sources, versus 36% and 46% for S&P 500 and Nasdaq names. This may provide some insulation from retaliatory tariffs levied against the US.
Valuations rose last month and the average delta of the FTSE Qualified Global Convertible Bond Index reached 47 as of January month end. This delta level offers a defensive buffer against a fall in equity market performance and has low interest-rate sensitivity in case Treasury yields rise if the disinflation trend stalls.
Convertibles’ more balanced profile may help navigate a still positive backdrop for risk assets given macroeconomic developments and current earnings releases. Headline volatility is keeping markets on their toes. In this environment, convertible bond convexity may offer performance in a smoother way in broad allocations, or as a complement to higher-yielding exposures in fixed income portfolios.
Figure 1: Convertibles Have Outperformed Other Bonds YTD
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