The U.S. convertible bond market has performed strongly this year, outpacing U.S. stocks and high-yield bonds

According to the Zhitong Finance APP, the U.S. convertible bond market has performed remarkably well, becoming one of the strongest asset classes this year. Driven by raw materials, technology stocks, and a range of growth companies, the overall return on convertible bonds has surpassed most major asset classes.

According to the ICE BofA U.S. Convertible Bond Index, as of last Friday, the cumulative return on convertible bonds this year is approximately 14%, higher than the S&P 500 Index's 13% during the same period. Meanwhile, the S&P MidCap 400 Index rose by 5%, and the SmallCap 600 Index increased by 4%. At the same time, the return on the major high-yield bond ETF, iShares iBoxx USD High Yield Corporate Bond ETF, was 7%.

The two largest convertible bond ETFs have performed even better. The SPDR Bloomberg Convertible Securities ETF (CWB.US) has a management scale of $4.4 billion and has risen by 15% this year. The iShares Convertible Bond ETF, with a management scale of $2.8 billion, has increased by 16%. Both funds reached a 52-week high in early trading on Tuesday. Analysts point out that this makes 2025 one of the best years for absolute and relative returns on convertible bonds in nearly a decade. Typically, convertible bonds yield less than stocks in a rising market because they are designed to capture most of the gains of the underlying stock while protecting investors in a downturn. However, the ICE BofA Convertible Bond Index only rose by 11% in 2024, significantly lagging behind the S&P 500 Index's 25% increase. This year's reversal is particularly pronounced.

Michael Youngworth, head of convertible bond research at Bank of America Securities, stated, "Convertible bonds in 2025 are one of the leading asset classes, outperforming stocks and high-yield bonds. They benefit from the rise of high-beta stocks." High-beta stocks are more volatile and typically rise faster during market upswings. Major contributors to this year's market performance include convertible bonds issued by companies such as Bloom Energy (BE.US), MP Materials (MP.US), and Boeing (BA.US). Boeing's convertible preferred stock issued last year has risen about 40% since its launch, benefiting from a significant rebound in Boeing's stock price. Additionally, Alibaba (BABA.US), as one of the largest overseas issuers, has seen its stock and convertible bond prices rise significantly this year, having recently completed a $3.2 billion convertible bond issuance.

Currently, the U.S. convertible bond market is approximately $325 billion in size, but retail investor participation remains relatively low. The complex product structure is a major barrier for individual investors, and most financial advisors are not sufficiently familiar with this market. The market is primarily dominated by institutional investors, especially arbitrage traders, who buy convertible bonds while shorting the issuer's common stock to engage in arbitrage. This year, as credit spreads have narrowed, convertible bond arbitrage strategies have performed excellently. Most convertible bonds trade in the over-the-counter market, similar to ordinary bonds; however, some convertible preferred stocks, such as Boeing's large issuance, are listed on the New York Stock Exchange or NASDAQ, offering liquidity closer to that of stocks.

According to Bank of America research data, the issuance scale of U.S. convertible bonds has reached $75 billion this year, and it is expected to exceed $84 billion in 2024. The largest new issuances in 2025 will come from companies such as DoorDash (DASH.US), GameStop (GME.US), Advanced Micro Devices (SMCI.US), and MicroStrategy (MSTR.US) Youngworth described the current market in the client report as a "Goldilocks" scenario, which is a perfect combination of low interest rates, tight credit spreads, and high volatility. He pointed out that the current market pricing has reached the most aggressive level in three years, with nearly 50% of issuances not paying interest (zero-coupon). More concerning is that over half of this year's global issuances belong to convertible bonds with "no clear use of proceeds," used only for companies' daily operations or expansions, marking the first occurrence since the pandemic financing wave. The current average market interest rate is 2%, with an average conversion premium of about 35%.

Although convertible bonds have performed impressively this year and provided issuers with unprecedented financing convenience, analysts caution that investors should remain vigilant. As valuations rise and zero-coupon transactions increase, future risks may escalate. In the long term, convertible bonds, as a hybrid tool of stocks and bonds, have historically provided returns significantly better than the bond market while tracking the stock market, and are expected to continue being an important component of diversified investment portfolios