Global Convertibles: The halftime report

Research evidence excerpt

Global Convertibles: The halftime report

ty may erode in the second half, making it Source: BofA Global Research

BofA GLOBAL RESEARCH

more difficult for managers to profit and leaving them with just rudimentary protection

in the event the AI trade turns south. Other downside risks to our revised global issuance

forecast include wider spreads, lower stocks, and waning CB underlying stock volatility. We include a list of abbreviations at

CBs remain uniquely positioned to trade AI with less risk the end of this report.

CB returns have also been strong in H1 as investors have looked past macro risks and

instead have traded on AI optimism. Globally, converts have added +18.5% outright, the

leading cross-asset performer. While frothy pricing and high concentration suggest

bigger tail events, PMs cannot afford to risk missing sharp upside. This in mind, we think

CBs’ asymmetric exposure to the booming AI trade (now over 30% of the global CB

market) is a compelling pitch. We’re calling for continued, yet more modest upside in H2.

Still, we concede that investing in CBs here is not without its challenges, especially for

directionally-driven managers, given the market’s already sizable run-up in H1, narrow

breadth, full valuations, limited array of alpha opportunities, and lack of spread cushion.

The vol and primary backdrops are supportive of CB arb

While this uncertain macro backdrop gives us little directional conviction, it is highly

supportive of CB arb, which has performed well versus other hedge fund strategies in H1

driven by elevated stock vol and robust new supply. The conducive conditions for the

long gamma strategy are likely to persist in H2, though we acknowledge that it’s become