At a glance
Investors face a time of strategic challenges and tactical uncertainty, and convertible bonds can help with both. · Strategically, a new paradigm in fixed income markets has left investors with portfolios whose remuneration of risk is too low and whose duration is too long.

Tactically, equity and bond valuations appear high and the business cycle is already one of the longest on record.

Convertible bonds combine features of both credit (with a promise to repay principal) and equity (with an embedded call option): one or the other dominates, or both are in balance, depending on the performance of the underlying equity.

They can help with today’s challenges by offering the downside protection associated with bonds at the same time as providing exposure to equity upside – all with shorter duration than conventional fixed income.

Investors give up some yield in exchange for equity optionality, but the gap is currently offset by the unusual cheapness of that optionality.

Overall, the balanced profile of convertibles should enable them to ride through a range of economic scenarios.