H1 was a defining moment for convertible bonds, with the asset class proving its relevance precisely when markets tested it. Most importantly, convexity was rigorously tested and confirmed.
With over $87bn already issued in 2026, the market is on track to meaningfully surpass last year’s record $160bn. Importantly, this is not just a story of volume. The pipeline is broad, diversified and increasingly dominated by high-quality structures with real bond floors.
The investor base has also broadened. Record secondary volumes, a more diverse issuer base across sectors and geographies, and growing institutional participation all point to an asset class that is no longer niche. Beyond simply reinforcing the case for convertibles, H1 showed that the market has become deeper, and more central to institutional portfolios.
Convexity counts
Convexity – the asymmetric payoff profile of convertibles, participating in equity upside while the bond floor limits downside – has always been the theoretical focus of the asset class. But it has rarely been more practically relevant than today’s environment.
In H1, a handful of AI, semiconductor, and infrastructure names drove most of the benchmark’s returns, while many others lagged or fell. Convexity, when applied to the right names, captures the former while limiting the cost of the latter.
After a decade of near-zero rates during which the fixed income component of convertibles offered little protection, the current yield environment has restored the bond floor to meaningful levels.
When the range of potential outcomes is wide, investors face a problem of positioning: be too defensive and miss the recovery, be too aggressive and suffer the drawdown. Convexity is structurally suited to this problem. Rather than betting on a single outcome – it allows investors to stay invested across a range of outcomes at an asymmetric cost.
Opportunity extends beyond mega caps
The AI investment cycle has created a rich environment for convertible bond investing – not by owning the largest hyperscaler names (which tend not to issue convertibles), but by accessing the ecosystem – software enablers, data management, and the power/cooling layer.
Many of these companies are at a stage where convertibles are a natural financing instrument – high growth, but with uncertainty around profitability timelines – and the dispersion of outcomes within this group creates stock selection opportunity. CoreWeave, Nebius, Cloudflare, and Snowflake have all been meaningful contributors YTD from this angle.
The SMID segment has historically been underserved by passive approaches, representing just 13% of the global focus index. However, it offers a richer opportunity set for active managers willing to do the fundamental work. These companies are less covered by analysts, offering genuine alpha for bottom-up stock pickers. Adding 20% SMID exposure to a convertible allocation has historically generated +50bps per annum since January 2019 while reducing volatility by 10bps, according to our calculation.
Valuations in SMID have compressed relative to large caps over the past five years, and many of these companies, particularly in healthcare, industrials, and specialty tech, are approaching the convertible market at structurally attractive entry points.
After a subdued period, M&A is recovering, and convertible bonds are disproportionately exposed to this dynamic. A takeover bid typically triggers change of control provisions that accelerate conversion or require redemption at a premium, generating upside for holders.
The current environment – marked by corporates with strong balance sheets, private equity capital looking to deploy, and regulatory scrutiny easing in some jurisdictions – is constructive for M&A optionality embedded in convertibles.
Discipline matters as markets narrow
The most caution is on areas where convertible bonds have started to behave more like equities than balanced instruments. This is particularly true in the high-delta bucket, where names trading at 80–100 delta offer limited bond-floor protection and are, in effect, equities with a maturity date. In a market where several of these names dominate the benchmark, passive investors are forced to hold them, while active investors can choose not to.
That caution also extends to momentum concentration risk. The benchmark’s increasing exposure to a handful of high-momentum names is a structural feature of the market that active managers need to manage. Rather than chasing rallies in names where conversion premiums have compressed to near zero; the focus remains on identifying the next layer of the same theme at more attractive entry points.
Geographic concentration is another area of focus. Portfolios that are overly concentrated in US technology risk being left exposed with insufficient downside protection if the sector corrects. For us, diversification across Europe, Asia and non-technology sectors such as healthcare, industrials and consumer is part of risk management.
Finally, credit-quality drift must be closely monitored. As issuance volumes rise, the quality of some issuers at the margin is beginning to deteriorate. Maintaining credit discipline and avoiding the temptation to reach for yield in weaker names remains a priority.
