If the recent market jitters are anything to go by, returns could prove hard to come by this year. The convexity of convertible bonds can provide investors with a way to navigate volatility in an inflationary environment.
The return of inflation, together with more aggressive (or less accommodative) central bank policy, has pushed front yields higher and dented growth exposures significantly.
While convertible bonds traditionally have weathered such market rotations well, global convertible bond markets, as measured by the Refinitiv Qualified Global Convertible Index, had their worst start to a year since 2004, falling 5.81% in USD terms. The turbo-charged rotation to value, led by energy (2% of the index), left high growth sectors such as technology (27%), communications (12%) and consumer cyclical (20%) battered as markets grappled with still-rising inflation and an increasingly hawkish Fed. See Figure 1 for the full performance contribution breakdown.
In the last days of January, the index recovered partially from its lows. Energy was a key standout for the month as oil prices rose on geopolitical tensions and inflation numbers hit decade highs in developed regions. However, the weight of energy companies in convertible bond universes remains low and thus provided only a small positive contribution.
Delta, a measure of equity sensitivity, fell from 56% to 52% in January.
While the US remains a dominant portion of the global convertible bond index, the proportion of balanced and bond-like exposures has increased, offering more convexity to navigate the potential bouts of volatility ahead.
While risk assets struggle to find direction and long-duration fixed income remains challenged by monetary tightening, convertible bonds should retain the benefits of lower rate sensitivity and their convexity profile, while also serving as a portfolio diversifier.
Convertible bonds also offer credit investors exposure to a set of issuers in high growth areas with only this type of debt on their balance sheets. However, some of these names – many rising stars of 2020 – have suffered since mid-November 2021 and, given the hawkish Fed pivot, their valuations may now look less rich. As the convertible offers an option on the underlying stock, upside participation is possible as share prices rebound on better earnings from these sectors.
Another important element for investors to consider, given the different pace of central bank rate increases, is the case for currency hedging. Once lift-off starts in the US, the USD could potentially weaken later in the second half of 2022 against the EUR (1.16 versus 1.14 currently) or the GBP (1.38/40 versus 1.36 currently), based on forecasts from Bloomberg. We are pleased to announce that, as of 31 January 2022, SPDR offers GBP and USD currency-hedged exposure to global convertible bonds, in addition to our existing EUR and CHF hedged share classes.
Investors looking to play the convertible bonds theme can do so with SPDR ETFs. To learn more about these ETFs, and to view performance histories, please click on the links below.
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For Investors in Austria: The offering of SPDR ETFs by the Company has been notified to the Financial Markets Authority (FMA) in accordance with section 139 of the Austrian Investment Funds Act. Prospective investors may obtain the current sales Prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual report free of charge from State Street Global Advisors Europe Limited, Branch in Germany, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400.F: +49 (0)89-55878-440.
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Issuers of convertible securities may not be as financially strong as those issuing securities with higher credit ratings and may be more vulnerable to changes in the economy. Other risks associated with convertible bond investments include: Call risk which is the risk that bond issuers may repay securities with higher coupon or interest rates before the security's maturity date; liquidity risk which is the risk that certain types of investments may not be possible to sell the investment at any particular time or at an acceptable price; and investments in derivatives, which can be more sensitive to sudden fluctuations in interest rates or market prices, potential illiquidity of the markets, as well as potential loss of principal.
THE SPDR REFINITIV GLOBAL CONVERTIBLE BOND UCITS ETF (THE “PRODUCT”) IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY REFINITIV LIMITED OR ANY OF ITS SUBSIDIARIES OR AFFILIATES (“REFINITIV”). REFINITIV MAKE NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS OF THE PRODUCT(S) OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN SECURITIES GENERALLY OR IN THE PRODUCT(S) PARTICULARLY OR THE ABILITY OF THE REFINITIV QUALIFIED GLOBAL CONVERTIBLE INDEX (THE “INDEX”) TO TRACK GENERAL MARKET PERFORMANCE. REFINITIV’ ONLY RELATIONSHIP TO THE PRODUCT(S) AND STATE STREET GLOBAL ADVISORS (THE “LICENSEE”) IS THE LICENSING OF THE INDEX, WHICH IS DETERMINED, COMPOSED AND CALCULATED BY REFINITIV OR ITS LICENSORS WITHOUT REGARD TO THE LICENSEE OR THE PRODUCT(S). REFINITIV HAS NO OBLIGATION TO TAKE THE NEEDS OF THE LICENSEE OR THE OWNERS OF THE PRODUCT(S) INTO CONSIDERATION IN CONNECTION WITH THE FOREGOING. REFINITIV IS NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN THE DETERMINATION OF THE TIMING OF, PRICES AT, OR QUANTITIES OF THE PRODUCT(S) TO BE ISSUED OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH THE PRODUCT(S) IS TO BE CONVERTED INTO CASH. REFINITIV HAS NO OBLIGATION OR LIABILITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR TRADING OF THE PRODUCT(S).
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