Convertible bonds are no longer just a recovery play. After a blockbuster 2025, the asset class is entering a structural renaissance that many investors are still misreading as a temporary fluke.
Convertible bonds delivered a standout 21.4% return last year, outstripping global equities (19.0%), global high yield (8.5%) and global aggregate (4.9%). The risk-adjusted returns were also noteworthy, with annualised volatility at 9.5% for convertibles, compared to 14.9% for global equities.
This outperformance was driven by two structural shifts: improving market breadth and optimal upside capture.
Broadening backdrop
The first of these was the broadening of the equity rally. Convertible bonds’ underlying equities outperformed global equities by 10.5% in 2025. Despite small- and mid-caps’ (SMID) underperformance against large-caps, 2025 was defined by improving market breadth, with more stocks participating in the global equities rally while the reliance on the Magnificent Seven diminished.
Notably, in the first quarter of 2025, Magnificent Seven earnings per share growth was 18.5% compared to 5.6% for the remaining 493 S&P 500 constituents. In the third quarter, the numbers were 14.6% and 12.2%, indicating more even participation across the index.
With the median market capitalisation for convertible bonds’ underlying equities being circa $8bn, it was no surprise to see convertibles performing strongly in that context.
Second, convertibles captured 72.4% of their underlying equities’ strong performance – up 21.4% against 29.6%. Multiple factors supported this. Some $343bn of new issuance since 2023, which is 69% of the total market, ensured a renewal of the asset class’ structure and opportunity pool in a context of stubbornly higher-for-longer rates.
This resulted in improved terms for investors: higher coupons and lower conversion premiums, meaning both stronger downside protection and increased upside participation.
A year marked by immense volatility, dispersion and sector rotations creates the perfect backdrop for convertibles to exhibit their convexity characteristics, as the April tariff-induced sell-off demonstrated.
Issuance in focus
This year is shaping up to be no different. The equity market landscape is showing further improvements for convertible bonds. Year-to-date, global SMID stocks have outperformed large-caps by more than 570 basis points (bps) and the MSCI World Equal-Weight index has outperformed the MSCI World by 430bps. In other words, the rally has broadened significantly, with 58% of the constituents of the MSCI World outperforming the index.
Looking specifically at convertibles’ underlying equities, dispersion is on the rise while the average underlying volatility is in its 95th percentile relative to the past five years.
Simply put, the conditions for convertibles to express their diversification benefits are at least the same – if not even better – than in 2025.
Issuance volumes and terms for 2026 are expected to at least match last year’s, since some $180bn of convertibles are set to be refinanced across 2026 and 2027.
When rates were zero or negative a decade ago, one could argue about companies tapping convertibles opportunistically − typically when their share price was high ─ but today’s set-up is completely different.
With rates higher for longer, substantial coupon savings are luring both SMID and large-cap companies into the asset class even if it means risking diluting their capital base.
Ultimately, convertibles no longer have to prove why they are an integral part of an asset allocation. They are an excellent diversifier to both fixed income – 60% of convertible issuers do not have any other form of public debt – and equities – with a median market capitalisation $8bn.
They are also incredibly useful for navigating volatility and dispersion, as the absolute, relative and risk-adjusted performances of the past 18 months have proven.
Crucially, the macro and micro conditions that underpin the asset class – from high rates and volatility to improving breadth and issuance – are here to stay. Convertibles have firmly moved from the periphery to the core.
Nicolas Crémieux, head of convertible bonds at Mirabaud Asset Management. The views expressed above should not be taken as investment advice.