Tutorial, Statement, Other
Signals & Noise: AI Exposure, Less Volatility? Enter Converts
- Investors may utilize convertible bonds to gain upside participation in long-term AI infrastructure builds while mitigating path risks, as the asset class experienced an 11% maximum drawdown over the last two years compared to 30–40% for AI-focused baskets and 19–20% for the S&P 500 and NASDAQ.
- Approximately one-third of the U.S. convertible market and 30% of the global market are now linked to the AI trade, with issuers leveraging these instruments to finance massive spending on data centers, compute, memory, power, and broader infrastructure at lower coupon rates than traditional debt.
- Global convertible issuance has reached a record pace of over $250 billion annually (upside from $175 billion year-to-date), expanding the total market to approximately $600 billion, including nearly $400 billion in the U.S.
- The median U.S. convertible issuer equity market cap has doubled to roughly $6 billion from three years ago, while investment-grade issuers now represent 20% of the global market, the highest share since the post-pandemic period.
- Embedded equity options within convertibles are becoming more valuable due to high volatility, with average single-stock volatility among U.S. issuers reaching the 97th percentile of its 2021 range, and roughly two-thirds of UK convertibles showing underlying stocks with one-month realized volatility exceeding implied option volatility.
- Typical maturities average around five years, providing long-duration optionality that is difficult to replicate in conventional markets, while current valuations are considered the most attractive of the year despite remaining at the 70th percentile relative to the previous decade.
- Concentration in the largest issuers has declined from recent peaks, and U.S. convertible retail funds attracted over $2 billion in net inflows in the last six months, though cumulative flows suggest the asset class remains under-owned relative to historical norms.