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        Can convertibles defy markets and keep rallying?

        In 2025 investor nervousness over Donald Trump's tariff announcements did not spare convertible bonds. However, they demonstrated their diversification and downside protection roles during the market shock—and then rebounded strongly.

        5 min read
        Antoine Lesne
        Head of ETF Strategy

        Donald Trump's 2 April Liberation Day tariff announcements affected all risk exposures, including convertible bonds. But the shock has proven the perfect environment to demonstrate the role that convertible bonds play in a portfolio. Converts demonstrated downside resilience very well, falling by only 4.5% while global equity markets lost 11.1%.1 Since the beginning of the year, the drawdown of the index (in USD unhedged terms) has been a mere -1.13%. This pales in comparison to the 11.13% fall of the MSCI ACWI index or the 20.84% decline of the Russell 2000 Small Cap Index.

        Markets have recovered ever since Trump announced a 90-day period for negotiation. Eventually, most countries and economic blocs were levied tariffs ranging from 10% to 50% or more. But the worst-case scenario seems to have been avoided, and markets focused on resilient earnings, longer-term trends, and supportive news, among which defense spending and digital currencies helped convertible bond issuers.

        Thirty-nine percent tariffs on Switzerland, and large, negative revisions of Nonfarm Payroll data, reignited market jitters on 1 August. The MSCI ACWI Index fell 1.3% and the Russell 2000 index, more sensitive to economic news, fell by more than 2% in a day. It was a potent reminder that markets can fall at any time, especially if lower summer liquidity exacerbates some moves. But convertible bonds have offered lower volatility and have outpaced the MSCI ACWI Index by 45bps (see figure 1).

        July surprise

        Convertible bonds exhibit a relatively low sensitivity to interest rate risk compared to high yield bonds, where credit spreads can widen sharply, and longer-term bonds, which are highly sensitive to increases in long-term yields.

        In July the politicized debate around the Fed kept bond volatility elevated. But the global convertible bond market experienced a positive 0.9% return. One factor was small-cap and defense asset appreciation, helping the FTSE Qualified Global Convertible Bond Index year-to-date performance reach 12.5% in USD unhedged terms. US and Asian issuers drove performance in July in the same way they did in June.

        Consumer Staples, Real Estate and Communications were laggard convertible bond sectors. Energy, Utilities and Financials were among the best performers. Issuance was robust at $11.4B USD. The US was the main issuer with around $6.5B USD. Chinese names such as Alibaba issued a jumbo 12B HKD bond. In a rare Japan convertible bond issuance, Nissan issued a 200B JPY 2031 bond.

        Convertible bond performance is expected to remain volatile as geopolitical tensions globally and tariff turbulence endures. But convertibles have provided a hedge against the stronger drawdowns of pure equity indices (see Figure 1). And the relatively low interest-rate sensitivity makes them less subject to performance volatility induced by fiscal deficit and its impact on long bond yields. Even if job market weakness offers the Fed an opportunity to cut rates, the relative boost to growth and small cap could support convertible bonds in the U.S.At the end of July 2025, valuations were slightly above their long-term average delta of the FTSE Qualified Global Convertible Bond index at 51.

        What are the main risks and supporting factors for convertible bonds?

        • Market capitalization: the global convertible bond universe consists of small and mid-caps for almost 50% of its exposure. These are more sensitive to economic growth setbacks and could suffer in recessionary scenarios. However, the market valuations of bonds by these issuers in the convertible bond universe are already low, limiting the risk of a further price pullback.
        • Credit risk: this would increase in the event of a recession. Credit spreads have already widened, which could complicate future refinancing. However, the default risk for convertible bond issuers is lower. From a ratings standpoint, they are often in the crossover segment, unlike high yield issuers, which are all sub-investment grade.
        • Equity/bond drivers: the diversification of the market within the convertible bond universe, with equity, mixed and bond profiles, makes it possible to navigate through different market configurations, as long as either equities or bonds are performing well. In particular, any recovery in equity markets — against a backdrop of uncertainties on the trade war front and a shallow recession — would support the performance of the asset class. Convertibles’ natural bias toward younger, small and mid-cap issuers offers exposure to growth sectors such as tech, biotech, and consumer discretionary. These companies often use convertibles for their first major debt issuance and stand to benefit from lower interest rates. Historically, firms like Tesla, Twitter, and NVIDIA tapped the convertible market before issuing senior unsecured bonds. Today, resilient sectors like healthcare and infrastructure are increasingly turning to convertibles—offering investors a blend of defensiveness and growth.
        • Rising coupons: a coupon rise is possible in a more stressed environment. The current yield on convertible bonds has already risen and currently stands at around 1.25%. This could rise further as converts issuers seek to attract new issue buyers.
        • Current valuations: these have increased, with the average delta of the FTSE Qualified Global Convertible Bond index at 51 - up from a low of 39 during the peak of tariff volatility but still in a balanced level). This level of delta offers a defensive profile against a fall in equity market performance, while having low interest-rate sensitivity if rising Treasury yields should the disinflation trend stall.

        The more balanced profile of convertibles may help investors navigate what can still be a positive backdrop for risk assets if the Fed eases. Ongoing 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 with SPDR: 

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