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60 seconds on why investors are converting to convertibles
Martin Kuehle discusses the appeal of convertible bonds amid a backdrop of increased market volatility.
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This year we have seen sudden set-backs in various assets. From big names such as Facebook or Tesla to emerging market currencies such as the Turkish lira, risk assets can correct viciously in one-day losses of more than 10%. Clearly, markets have become more volatile.
Convertible bonds have provided remarkable stability. When global equity markets dropped almost 10% in the first quarter, convertibles only moved down 3%. That's an above-average level of protection.
Investors are turning to convertibles exactly for this protection against falling equity markets. Others have switched out of high yield positions in order to cut down on credit and duration exposure.
With renewed demand for convertibles, the primary market has jumped into action. This year we have seen more than $70 billion of new paper and we think that the convertible bonds universe will increase for the first time in ten years.
Finally, valuations for convertible bonds have come down and convertibles have cheapened. On average, convertibles are now fairly priced, but there are regional pockets of cheapness such as in Asia and Japan. We think that low duration combined with effective protection against volatile equity markets will continue to attract demand for this asset class.