Making convertibles great again

The US convertible bond (CB) market returned 11.0%¹ in 2024 and has begun 2025 with increased momentum, driven by a confluence of economic, market, and structural factors. With USD292bn in market capitalisation and 459 outstanding issues², the US market accounts for 67% of the global CB investment universe, underscoring its dominance in this hybrid asset class.

As companies and investors navigate a high interest-rate environment, convertibles are emerging as a compelling option for financing and investment. We take a closer look at the data points and trends shaping the US market.

1. ISSUANCE SURGE BRINGS NEW OPPORTUNITIES

The US CB market saw a signifi cant issuance rebound in 2024, with USD78.9bn in new supply. This represented approximately 75% of total global issuance at USD105.6bn. Asia accounted for the bulk of the remainder, contributing USD14.5bn. Europe and Japan lagged, issuing USD5.8bn and USD6.4bn respectively, reflecting regional disparities in market dynamics.

Refinancing needs were a key driver of issuance, accounting for 30% of total proceeds, alongside general corporate purposes at 43%. The US market benefi ted from a wave of refinancing activity as issuers addressed the maturity wall of pandemic-era CBs. With approximately USD34bn and USD55.7bn of notional that should be redeemed or converted in 2025 and 2026, we expect this trend to continue as elevated interest rates have made CBs an attractive financing option for issuers.

According to BofA Research³, CB coupons averaged 2.8% in 2024, compared to 7.7% for high yield bonds, providing significant cost savings. Even after accounting for the cost of capped calls, which issuers use to mitigate equity dilution, CBs offered an average annual savings of 2.3% over straight debt.

2. SECTOR BREAKDOWN HIGHLIGHTS INNOVATION & GROWTH

The US CB market is heavily concentrated towards growth-oriented sectors, with technology accounting for 31% of market capitalisation (USD91.2bn) and 29% of issues (133 bonds). Healthcare follows with 13% of market cap (USD38.5bn) and 18% of issues (81 bonds)⁴. Consumer discretionary and financials each contribute 11% to market capitalisation, while industrials and utilities round out the top sectors with 10% each. Among smaller contributions, we can highlight energy (2%), real estate (3%), and materials (2%), underpinning the market’s diversification. Notably, the technology sector’s reliance on CBs for fi nancing underscores its capitalintensive nature, while healthcare issuers leverage CBs to fund high-risk, high-reward R&D projects.

3. MAGNIFICENT 7 ALTERNATIVE

Small and mid-cap companies (SMID), with market caps of <USD5bn, dominate the US convertible bond market in terms of number of outstanding issues, accounting for 53% and 242 issues. However, they represent only 28% of the total market value at USD81.5bn. In contrast, large-cap companies contribute 47% of the total issues (214 bonds) but make up a signifi cantly larger share of the market value, representing 72% at USD211bn. Given the current extreme concentration in the US equity market, with the top 10% of stocks now representing a record 75% of total market cap5, holding an exposure to CBs can provide valuable diversifi cation, offering investors access to a broader opportunity set beyond the dominant mega-cap stocks.

4. DOMESTIC REVENUE FOCUS INSULATES AGAINST TARIFF RISK

US convertible issuers are relatively insulated from retaliatory tariffs due to their more domestically oriented revenue streams, as the risk of a broader trade war persists. According to BofA Research6, only 27% of US CB issuers have suppliers in China (including Hong Kong and Taiwan), with industries such as household products, tech hardware and electronics being the most vulnerable. In addition, 31% of US CB issuers have at least one supplier in Canada, while 6% have at least one in Mexico, particularly in sectors like automakers, gaming, and integrated electric, though overall exposure to these regions is less than that to China.

5. M&A TO REMAIN A RETURNS CATALYST

Trump’s policies to ease M&A regulation could boost smaller-cap stocks. According to our findings, since 2014, takeover activity has been signifi cant among convertible bond issuers, largely due to SMIDs making up 72% of US takeover targets. There have been 34 takeovers over the last three years, including the latest Bain Capital acquisition of Envestnet (closed in November 2024), while the healthcare sector saw increased deal activity, with examples including Johnson & Johnson’s purchase of Shockwave Medical.

6. THE BEST PROFILES MAKE A STRONG COME BACK

‘Balanced’ CB profi les – which is the only category that provides convexity – dominate the US market, representing 43% of market cap (USD126.2bn) and 41% of issues (189 bonds). ‘Bond-like’ CBs account for 31% of market cap (USD89.5bn), while ‘equity-like’ profi les, which are more sensitive to stock price movements, make up 26% (USD76.3bn). Over time, we anticipate continued improvements in the characteristics of the CB market, driven by a dynamic primary market that fosters asymmetric profi les and the redemption of sub two-year maturity issues, which are largely characterised by bond-like profiles.

7. STRENGTHENING ASYMMETRIC RETURN PROFILE

Asymmetry analysis looks backwards, measuring convertible bonds’ price participation in their underlying equity moves. Using the FTSE US Convertible Bonds Index (USD hedged) and its so-called ‘parity’ index, representing the performance of the underlying equities, we find an average upside participation of 50% since 1H 2019, peaking at 68% in 1H 2021 and bottoming at 39% in 1H 2023. Conversely, downside participation averaged 47%, reaching 65% in 1H 2021 and a low of 34% in 1H 2023. US CBs’ participation levels depend on delta, but their upside/downside capture ratio offers key insights into risk/reward. There was a signifi cant improvement in 2H 2024 to 1.14x, from a record low of 0.90x in 1H 2022. We expect this positive trend to continue, refl ecting CBs’ current dynamics.

Our view

The US CB market is well-positioned for 2025, driven by economic growth, attractive SMID valuations relative to large-caps, refi nancing needs and potential growth in M&A activity. With a stronger asymmetric return profile, we believe CBs present a compelling opportunity for investors seeking exposure to SMID companies with added downside protection, although selectivity and active management will be key.