Convertible Bonds Outperform Stocks, High-Yield Bonds with 14% Gain

This year, the U.S. convertible bond market has shown remarkable strength, outperforming both the U.S. stock market and high-yield bonds. The overall return of convertible bonds has surpassed that of most major asset classes, driven by sectors such as commodities, technology, and a series of growth-oriented companies.

According to the ICE BofA U.S. Convertible Bond Index, as of last Friday, convertible bonds have delivered a cumulative return of approximately 14% this year, surpassing the 13% return of the S&P 500 Index over the same period. In comparison, the S&P MidCap 400 Index rose by 5%, and the S&P SmallCap 600 Index increased by 4%. Meanwhile, the iShares iBoxx $ High Yield Corporate Bond ETF, a major high-yield bond ETF, returned 7%.

The two largest convertible bond ETFs have performed even better. The SPDR Bloomberg Convertible Bond ETF, with assets under management of 44 billion, has risen by 15% year-to-date. The iShares Convertible Bond ETF, with assets under management of 28 billion, has seen a 16% increase. Both funds reached their 52-week highs during Tuesday's early trading session. Analysts noted that this makes 2025 one of the best years for absolute and relative returns of convertible bonds in nearly a decade. Typically, convertible bonds underperform stocks in bull markets because they are designed to capture most of the target stock's gains while protecting investors in down markets. However, the ICE BofA Convertible Bond Index rose by only 11% in 2024, significantly lagging behind the S&P 500 Index's 25% gain. This year's reversal is particularly striking.

Michael Youngworth, head of convertible bond research at a major U.S. bank, stated, "In 2025, convertible bonds are one of the leading asset classes, outperforming both stocks and high-yield bonds. They have benefited from the rise of high-beta stocks." High-beta stocks are more volatile and typically outperform the market during upswings. Major contributors to this year's market performance include convertible bonds issued by companies such as Bloom Energy, MP Materials, and Boeing. Boeing's convertible preferred stock, issued last year, has seen its price rise by approximately 40%, driven by a significant rebound in Boeing's stock price. Additionally, Alibaba, one of the largest overseas issuers, has seen substantial gains in both its stock price and convertible bond price this year, completing a 32 billion convertible bond issuance recently.

The U.S. convertible bond market currently has a size of approximately 325 billion. However, retail investor participation remains low due to the complex product structure, which is a significant barrier for individual investors. Most financial advisors are also not well-versed in this market. The market is primarily dominated by institutional investors, particularly arbitrage traders who buy convertible bonds while shorting the issuer's common stock to profit from price discrepancies. This year, as credit spreads narrowed, convertible bond arbitrage strategies have performed exceptionally well. Most convertible bonds trade over-the-counter, similar to ordinary bonds, while 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 research data from a major U.S. bank, the issuance of convertible bonds in the U.S. has reached 75 billion so far this year, with the full-year issuance expected to exceed 84 billion from 2024. The largest new issuances in 2025 come from companies such as DoorDash, GameStop, Super Micro Computer, and Strategy. Youngworth described the current market as a "Goldilocks period," characterized by low interest rates, tight credit spreads, and high volatility. He noted that current market pricing is at its most aggressive level in three years, with nearly 50% of issuances not paying interest (zero-coupon). More notably, over half of the global issuances this year are convertible bonds without a clear use of funds, intended solely for daily operations or expansion, a trend not seen since the pandemic financing boom. The current market average interest rate is 2%, with an average conversion premium of approximately 35%.

While convertible bonds have shown impressive performance this year, providing issuers with unprecedented financing opportunities, analysts caution investors to remain vigilant. As valuations rise and zero-coupon transactions increase, future risks may escalate. Historically, convertible bonds, as a hybrid of stocks and bonds, have tracked the stock market while delivering significantly higher returns than the bond market. They are expected to continue as an important component of diversified investment portfolios.