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With multiple sources of return, convertible bonds are well-suited for uncertainty in today’s markets
Arnaud Gernath
CIO, Convertible Bonds
Lydia Chaumont
Client Portfolio Manager for Convertible Bonds
key takeaways.
Convertible bonds offer diverse sources of return – ranging from equity upside, credit-spread compression, yield, duration and volatility. Able to adapt to different market environments, they can serve as a strategic tool for investors
Volatility benefits convertibles by increasing the value of the embedded equity option. Meanwhile, the bond floor and yield help cushion downturns. This potential to deliver convexity is valuable in uncertain markets, such as those experienced in 2025 so far
With a track record dating back to 1987, we manage one of the largest global convertible bond strategies available in the market. We have the coverage, experience and knowledge to navigate market cycles and adapt to investors’ specific needs.
In today’s investment landscape, shaped by uncertainty, convertible bonds offer a compelling proposition. Their hybrid nature taps into multiple sources of return – equity, credit, interest rates, and volatility – while providing a degree of downside protection. As we progress into H2 2025, these dynamics are more relevant than ever.
Equity: upside participation
Each convertible bond has an embedded option to convert the instrument into equity. This feature allows investors to participate in the upside of the issuer’s stock, particularly when markets rally. This offers exposure to equity-like returns without full exposure to equity risk. When the underlying stock performs well, the value of the conversion option increases, improving the bond’s overall return.
As debt instruments, convertible bonds are sensitive to changes in the issuer’s credit quality. Improvements in creditworthiness can lead to tightening credit spreads, in turn enhancing bond valuations. Conversely, deteriorating credit conditions can weigh on performance, especially if the equity option is losing value, or out of the money. But in the right conditions, this dual exposure means convertibles can benefit from both equity rallies and credit spread compression.
Interest rates: navigating duration
Like all fixed-income securities, convertibles are influenced by interest-rate movements. Rising rates typically erode bond prices, but convertibles tend to be less rate-sensitive than traditional bonds due to their equity-linked optionality. In a falling-rate environment, the bond component becomes more valuable, providing a cushion against equity market volatility. This makes convertibles a versatile tool in navigating shifting rate regimes.
Convertibles have a distinct advantage, especially in today’s environment: volatility is a performance driver. The equity option gains value when stock-market volatility rises, making convertibles particularly attractive in uncertain or choppy markets. From 2019–2022, volatility was a significant contributor to performance, helping investors weather corrections in both equity and bond markets. Although stabilising markets weakened this performance driver in 2023, volatility remains a key source of convexity – the ability to capture upside while limiting downside.
Looking ahead, we expect volatility to remain elevated. Tariff uncertainty and renewed concerns about US fiscal sustainability are likely to lead to whipsawing sentiment. In this environment, convertibles can act as a strategic buffer, offering asymmetric returns that are difficult to replicate with pure equity or fixed-income instruments.
While convertibles are often prized for their optionality, yield remains a critical component of total return. Coupons provide a steady income stream, which can be particularly valuable in sideways or declining markets. In periods when the equity option is out of the money, the bond’s yield helps preserve capital and generate return. This income component also supports portfolio stability – which, combined with the upside potential from equity appreciation and spread compression, can make convertibles suitable for a wide range of investment mandates.
Think convertibles, think LOIM
With a track record dating back to 1987, Lombard Odier Investment Managers has long been recognised for our expertise in convertible-bond investing. Favouring quality credits and issuers with sustainable long-term business models, our disciplined investment process has been tried and tested over numerous market cycles.
In a peer group where closures, mergers and shifts in investment philosophy have taken place in recent years, our team and approach remain stable. Managing one of the largest global convertibles strategies available in the market, our strategy has the capacity to manage inflows – and our team has the coverage, experience and knowledge to adapt to investors’ specific needs.
to learn more about our Global Convertible Bond strategy, click here.
important information.
For professional investors use only
This document is a Corporate Communication for Professional Investors only and is not a marketing communication related to a fund, an investment product or investment services in your country. This document is not intended to provide investment, tax, accounting, professional or legal advice.
