Signals & Noise: AI Exposure, Less Volatility? Enter Converts

Record Market Growth and AI Dominance

• The global convertible bond market has reached approximately $600 billion, including nearly $400 billion in the U.S.
• Year-to-date global issuance reached $175 billion, running at an annualized pace exceeding $250 billion.
• Roughly one-third (30%) of the U.S. convertible market is now directly linked to the AI trade, moving from an adjacent sector to a primary financing engine for the build-out.
• AI capital needs are increasingly funded via converts by hyperscalers (Alphabet, Oracle), neoclouds (CoreWeave, Nebius), and data center firms (Cypher, Terawolf).

Superior Risk-Adjusted Performance

• In 2026, U.S. and global convertibles have outperformed broader equity and fixed income markets on both absolute and risk-adjusted bases.
• Over the last two years, AI-focused custom baskets experienced max drawdowns of 30–40%, while U.S. convertibles maintained a max drawdown of just 11%.
• Convertibles maintained an ~80% correlation to AI themes while significantly mitigating path risk compared to the S&P 500 (19% drawdown) and NASDAQ (20% drawdown).
• Median U.S. convertible issuer equity market cap is approximately $6 billion, roughly double the level from three years prior.

Volatility as an Asset and Asymmetric Structure

• Convertibles function as a corporate bond plus an equity option, providing income and downside cushion while allowing participation in equity upside.
• Average single-stock volatility among U.S. convertible issuers is in the 97th percentile of the 2021 range, increasing the value of the embedded equity option.
• Approximately two-thirds of U.K. convertibles have underlying stocks with one-month realized volatility exceeding the volatility implied by the embedded option.
• The five-year typical maturity offers long-duration optionality that is difficult to replicate via conventional stock options, particularly in smaller infrastructure or alternative energy names.

Shift in Issuer Quality and Supply

• Investment-grade issuers now represent approximately 20% of the global market, the highest share since the post-pandemic period.
• The misconception that converts are solely for small, speculative growth companies is outdated; the asset class now includes large-cap household names funding strategic capital spending.

Valuation and Flow Dynamics

• The July 2026 sell-off caused U.S. converts to fall over 5% (their largest monthly decline since 2022), compared to at least a 7% drop in the underlying S&P 500.
• Implied valuations have returned to the most attractive levels of the year, though they remain at the 70th percentile over the previous 10 years.
• U.S. convertible retail funds attracted over $2 billion in net inflows in the last six months, a 7% of assets rate, marking the strongest flow period since mid-2021.
• Despite improved demand, cumulative long-horizon flows suggest the asset class remains under-owned relative to historical averages, avoiding overcrowding.