Convertible bonds: supply, convexity and volatility create positive dynamics

Why now? Tactical tailwinds for convertible bonds

Current market dynamics present a compelling case for convertible bonds. Several tactical factors support our constructive outlook for the asset class including:

• Robust primary market activity
• The return of convexity
• An outlook for elevated volatility
• Renewed investor demand

Read more: Away from the pack: how convertibles enhance portfolio diversification beyond equity and credit markets

Supportive issuance trends

A vibrant primary market continues to enhance the breadth and depth of the convertible universe. We expect strong supply trends to continue in Q4; Asian issuance could potentially double before the end of the year.

Since early 2023, over USD 300 billion in new issuance has expanded the universe to an estimated USD 500 bn. Year-to-date issuance in 2025 stands at USD 115 bn¹ and forecast to reach USD 140-150bn by the end of the year. July alone saw USD 11.4 bn in fresh paper, marking the strongest July since 2007. Notably, deals have been routinely oversubscribed, underscoring strong investor appetite.

New issues benefit investors because they typically come at a discount, offering attractive entry points and enhancing return potential. Typically, this new paper tends to outperform existing bonds in the first three months after launch. Figure 1 shows the historical performance of the primary market compared to the benchmark.

Fig 1. Historical performance of new convertible bond issuance compared to the benchmark²

Fresh supply also contributes positively to market dynamics because it:

• Adds liquidity and convexity to the convertible universe
• Receives technical support on index inclusion
• Diversifies the pool of investable names.

Active borrowing has featured recently from US, Asian and Japanese names. In Q4, we see particularly strong issuance from Asia. For instance, Alibaba³ raised USD 3.2 bn in convertible debt maturing 2032 in September. The Chinese company will use the proceeds for general corporate purposes, with a strategic emphasis on cloud infrastructure and international commerce business operations.

Read more: Convertible bonds for the ups and downs of uncertainty

Convexity is back

Convertible bonds offer an asymmetric return profile – known as convexity – by combining equity upside participation with bond-like downside protection.  The embedded equity option  gives investors the potential to convert the bond into shares and participate in the upside of the issuer’s stock without full exposure to equity risk. Simultaneously, convertibles pay coupons like a traditional bond, providing downside protection should the equity option not be exercised.

In 2025, convertible bonds have demonstrated this convexity in action. Our global strategy captured more than 90% of the equity market rally from January to mid-February 2025 while limiting downside exposure to less than 40% during the MSCI World index correction after the US tariff announcements in April. When markets rebounded, the strategy again participated in more than 50% of the upside.

Fig 2. An asymmetric profile: equity market participation in 2025⁴

This performance has been underpinned by inexpensive valuations, strong underlying equity performance and high-quality credit issuers – reinforcing the bond floor and enhancing convexity.

Volatility as a performance catalyst

Convertibles are structurally positioned to benefit from volatility. Rising equity volatility increases the value of the embedded option, making the asset class particularly attractive in uncertain or choppy markets. Historically, volatility has acted as a buffer against corrections in both equity and fixed income markets. It also creates tactical opportunities for profit-taking and re-entry.

In the short term, the prevailing environment is conducive to maintaining the ongoing low volatility regime. We see 2026 being more eventful, however, and markets have not yet priced in events that could cause higher volatility. These events include geopolitical tensions; debates about the independence of the Federal Reserve; the risk of higher inflation in the US; slower than expected adoption of AI leading to swings in market sentiment and volatility in large cap tech stocks; and an increase in stock correlation after a period of lower levels.

We anticipate more frequent volatility spikes going forward, and these should remain a key driver of potential performance.

Why LOIM for convertible bonds?

Run by a highly experienced global investment team that is dedicated to the asset class, our strategy has an uninterrupted track record since 1987. Our global convertible bond range is comprised of funds and mandates covering the full convertible bond universe. We have the scale and capacity to add incremental assets to our global convertible allocation.

Adopting a benchmark agnostic stance, we actively use call options to add convexity, generate alpha and mitigate risk where our views differ from benchmark weights. The combination of our clear process and consistent liquidity management makes us an ideal partner for larger mandates.

Momentum builds

From the resurgence of convexity to volatility-driven performance and strong issuance trends, momentum is clearly building in favour of convertible bonds and attracting increasing investor interest. Strong underlying equity performance has been a strong driver of performance. In our view, the asset class is well-positioned to deliver attractive risk-adjusted returns in the current environment.