Convertible Bonds Show Renewed Strength Amid Global Rally

Global convertible bonds continued to benefit from the worldwide equity rally in the third quarter, underscoring their reputation as a defensive yet growth-oriented asset class. According to Arnaud Brillois, Portfolio Manager and Head of the Global Convertible Team at Lazard Asset Management, convertible bonds have performed on par with global equities since the start of the year — despite their inherently more conservative risk profile. At the same time, they have significantly outperformed other bond-like asset classes in terms of returns. Brillois believes that this positive momentum may mark the beginning of a new market cycle.

He draws parallels to earlier periods, such as 2006–2007, when convertibles managed to preserve their defensive characteristics while generating returns comparable to those of global equities over several years. “We may be at the start of a similar cycle,” he suggests, citing favorable regional and sector positioning, as well as the strong issuance activity since 2024, which supports more convex structures in the convertible bond market.

The U.S. as the Driving Force

Sector dynamics also appear favorable. With a strong focus on technology, biotechnology, and consumer services, the U.S. convertible bond market could benefit from the “America First” policy direction, given that many of these companies are domestically oriented. Meanwhile, a more accommodative Federal Reserve, even if only cautiously so, may provide additional tailwinds for underlying equities, as mid-cap firms are typically more sensitive to interest rates.

Positive Signals from Europe and Asia

In Europe, greater fiscal flexibility among governments may support the industrial sector, benefiting convertibles issued by companies in defense, aerospace, and infrastructure. In Asia, China has signaled its intent to bolster the technology sector, partly in response to U.S. trade restrictions. Domestically focused Chinese consumer companies may also stand to gain as Beijing seeks to stimulate growth.

Strong Fundamentals and Credit Quality

Brillois emphasizes that convertible bond structures remain fundamentally attractive for investors. Higher global interest rates have enhanced the yield component of the asset class, and convertibles continue to trade at a notable yield premium compared with similarly rated traditional bonds. This is particularly significant considering their historically lower default rates. “Given their sector composition—tilted toward growth-oriented companies with simpler balance sheets—convertibles continue to offer a more defensive credit profile than conventional corporate bonds, while also providing an additional source of return,” Brillois explains.

Robust Issuance Supports Growth Outlook

New issuance has been strong this year, reaching about $125 billion and exceeding historical averages. This elevated supply helps maintain market depth and offers investors attractive entry opportunities through higher coupons and lower conversion premiums. While most issuers remain U.S.-based, there has also been a notable resurgence in Asian issuance. Brillois expects this robust issuance trend to persist in the coming months, driven by elevated interest rates and a wave of upcoming corporate maturities — both of which should sustain convexity and yield potential within the asset class.

Outlook: Optimism Amid Opportunity

Overall, Brillois remains optimistic about the outlook for convertible bonds. The current macroeconomic backdrop provides a supportive environment for many issuers, while the market’s convex structure continues to offer appealing return prospects — allowing investors to participate in equity market gains while maintaining protection during volatile periods.