“Paid to wait”: The new paradigm in convertible bonds

The average global convertible bond yield to maturity is now above 0% for only the fourth time since the high in October 2008. Prior to this, it had been mostly negative, as issues were trading substantially greater than par.

This tells us that a convertible bond's negative yield does not represent the amount of money an investor will make if they hold the bond to maturity. Rather, it’s the greatest loss they could incur should the underlying stock crash and the convertible mature ‘out of the money’.

The yield to maturity/put of the Refinitiv Global Convertibles Index increased from a record low of     -11.8% on 15 February 2021 to +1.2% on 31 October 2022.

^{Source: Refinitiv, Mirabaud Asset Management, 31 October 2022. Data is Refinitiv Global Hedged}

Bear markets, in our opinion, frequently present opportunities to invest in convertible bonds that are significantly out of the money, and occasionally trade at exceptionally high yields for a short amount of time. This is due to the bonds being sold by accounts that want to be more sensitive to changes in the value of the equity through balanced profiles (40<delta<80).

Although the convertible bonds trading at discounts may look attractive, it is important to thoroughly examine the issuers' fundamentals to ensure that they are creditworthy, and that any fundamental deterioration is likely to be short-lived.

In our view, the average asset class profile provides an appealing entry point and a reasonable approach to restoring exposure to equities with a controlled level of risk. Experience has shown that the market typically takes several months to fully absorb underpriced, discount convertibles.

IMPORTANT INFORMATION

This marketing material is for your exclusive use only and it is not intended for any person who is a citizen or resident of any jurisdiction where the publication, distribution or use of the information contained herein would be subject to any restrictions. It may not be copied or transferred.

This material is provided for information purposes only and shall not be construed as an offer or a recommendation to subscribe, retain or dispose of fund units or shares, investment products or strategies. Potential investors are recommended to seek prior professional financial, legal and tax advice. The sources of the information contained within are deemed reliable. However, the accuracy or completeness of the information cannot be guaranteed and some figures may only be estimates. In addition, any opinions expressed are subject to change without notice.

All investment involves risks, returns may decrease or increase because of currency fluctuations and investors may lose the amount of their original investment. Past performance is not indicative or a guarantee of future returns.

Issued by: in the UK: Mirabaud Asset Management Limited which is authorised and regulated by the Financial Conduct Authority. D14 In Switzerland: Mirabaud Asset Management (Suisse) SA, 29, boulevard Georges-Favon, 1204 Geneva. In France: Mirabaud Asset Management (France) SAS., 13, avenue Hoche, 75008 Paris. In Luxembourg, Italy and Spain: Mirabaud Asset Management (Europe) SA, 25 avenue de la Liberté, L-1931 Luxembourg.