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        Why have convertible bonds outperformed equities in 2025?

        Anxiety over President Trump's tariff announcements did not spare convertible bonds earlier this year. But convertibles delivered on their diversification and protection characteristics during that market shock in April — then rebounded so strongly that they have outperformed equities.

        6 min read
        Antoine Lesne profile picture
        Antoine Lesne
        Head of ETF Strategy

        The US economy’s strength and the Federal Reserve’s (Fed) slow policy easing have weighed on bond market returns since rates peaked in mid-2023 and supported gains in equities and other risk assets. If earnings remain strong, it is likely that equities may continue to outperform bonds.

        Convertible bonds have captured equity upside, delivering strong returns so far in 2025 and outperforming equity indexes (Figure 1). At the same time, convertibles offer a buffer against the kind of sharp equity index drawdowns that occurred after Liberation Day. And their relatively low sensitivity to interest rates makes them less exposed to volatility stemming from fiscal deficit concerns and rising long-term bond yields. Convertibles also provide extra resilience through their crossover credit quality and sectoral and geographic diversification — around 40% of the FTSE Qualified Global Convertible Bond Index constituents are outside the US.

        Convertible bonds have continued to deliver even when renewed tariff threats and strong revisions of NFPs (Non Farm Payrolls) alarmed markets in August. In our view, the recent market stress on AI valuation could support a pre-Christmas rally.

        Convertible bond convexity has delivered this year

        October’s AI optimism and signals of an accommodative Fed helped drive global convertible bonds to new year-to-date highs. The FTSE Qualified Global Convertible Bond Index rose by 2.4% performance in the month — bringing year-to-date performance close to 24.3% in USD unhedged terms.

        Asia and US securities heavily contributed to outperformance, while AI exposure fuelled Technology's sector leadership, which delivered a 7.8% return in the month, ahead of Industrials’ 7.0%.1 In terms of individual securities, SK Hynix jumped 56% as demand from AI chip maker Nvidia further boosted the sector. Weaker sectors included Consumer Discretionary, down 3.7%, hampered by Alibaba’s weaker bond performance. The worst performer was Strategy, a digital currency treasury company, which fell about 10% for the month and contributed -0.3% of the index performance.

        New issuance did not match September’s record month, but $11.8B USD in new bonds was printed, $9B in the US. Strong investor appetite and advantageous valuations fuelled AI-related issuance. $138B USD of new bonds has been issued year to date — likely to be the biggest annual issuance since 2021 or 2020.

        We expect convertible bond performance to provide potential protection to the downside as markets remain volatile amid continuing geopolitical tensions and AI valuation concerns.

        Continued AI capex and Fed largesse may boost growth and small-cap equities, which form a big portion of the global convertible bond universe. Valuations are above the long-term average delta of the FTSE Qualified Global Convertible Bond Index at 58 as of October month end. The profile has a slightly higher equity tilt — but convertible bonds may continue to offer a balanced profile: insulation against a fall in equity market performance and potential to outperform other areas of fixed income if risk appetite remains. Adds may after convertible bonds.

        Figure 2: The right balance between bond like, balanced and equity like convertible bonds

        The right balance between bond like, balanced and equity like convertible bonds

        What are the main risks and supporting factors to continued convertible bond performance?

        • Market capitalisation: Almost 40% of the global convertible bond universe consists of small- and mid-cap exposure, which are sensitive to economic growth setbacks and could suffer in recessionary scenarios. But market valuations of bonds by these issuers in the convertible bond universe are already low, limiting the risk of a big price pullback.
        • Credit risk: A recession would increase credit risk. Credit spreads have already widened, which could complicate future refinancing. However, the default risk for convertible bond issuers remains low. From a ratings standpoint, convertibles are more typically concentrated in the crossover segment, unlike high yield issuers, which are all sub-investment-grade.
        • Equity/bond drivers: The convertible bond market spans equity-like, balanced, and bond-oriented profiles, providing a built-in diversification that helps maintain performance across different market conditions — assuming either equities or bonds are performing well. A recovery in equity markets, even amid trade war uncertainty and a shallow recession, would further support the asset class. Convertibles’ natural bias toward younger, small- and mid-cap issuers offers exposure to high-growth sectors such as technology, biotech, and consumer discretionary. These companies often use convertibles for their first major debt issuance, benefiting from lower interest rates. Historically, firms like Tesla, Twitter, and NVIDIA tapped the convertible market before issuing senior unsecured bonds.
        • Rising coupons: A coupon rise is possible in a more stressed environment. The current yield on convertible bonds has already risen and stands at around 1.25%. This could rise further as converts issuers seek to attract new issue buyers.
        • Valuations: these have increased, with the average delta of the FTSE Qualified Global Convertible Bond index rising to 51 (up from a low of 39 during the peak of volatility but still in a balanced level). This delta level provides a defensive stance against equity market declines while maintaining low sensitivity to interest-rate movements — even if Treasury yields rise due to a pause in the disinflation trend.

        The more balanced profile of convertibles may help investors navigate what can still be a positive backdrop for risk assets. The Fed is likely to ease, and earnings releases have broadly been positive. Headline volatility will keep market participants vigilant, and the convexity offered by convertible bonds may help deliver smoother performance — either within broad allocations or as a complement to higher-yielding exposures in fixed income portfolios.

        Exposure to convertible bonds:

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