In this column, authors comment on economic and financial topics.

Convertible bonds were by a wide margin the best-performing bond segment in 2025 and even outpaced global equities. Measured by the FTSE Global Convertible Bond Index, hedged into USD, they delivered a return of 23.6 percent, driven primarily by the equity market rally.

Moderate risk parameters

The very strong performance of convertible bonds has led some investors to question whether the upswing can continue. However, there are good reasons to believe it can.

The improving economic outlook—particularly in the United States and the eurozone—should push equity markets to new record highs. And the performance of convertible bonds is primarily driven by the share prices of the issuing companies.

«Developments in new issuance volumes also continue to support convertible bonds.»

While many equity markets are already highly valued, historical evidence suggests that valuations tend to continue rising during periods of steady economic growth. Despite equity market highs, risk parameters for convertible bonds remain moderate and are likely to demonstrate their added value again in 2026.

Remarkable affordability

Developments in new issuance volumes also continue to support convertible bonds. In terms of primary market volume, 2025 was the strongest year in the past 18 years, and another high issuance volume is expected in 2026. At the same time, the market is characterized by remarkable affordability and a persistently high share of investment-grade issues in total issuance.

The increased share of investment-grade bonds—from 14 percent at the beginning of 2021 to 26 percent in the fourth quarter of 2025—is part of a broader trend toward higher-quality issuance observed in recent years, particularly in the United States. A strong primary market significantly improves opportunities, as new names with better risk-return profiles come to market rather than old debt simply being refinanced. This dynamic is also likely to be a powerful driver of asset-class performance in 2026.

Historically, the highest annual returns for convertible bonds have typically coincided with the years that saw the largest primary market volumes.

New themes enrich the convertible bond market

The conditions for another strong issuance year are favorable. We are at the early stages of a new major investment cycle, as energy-generation capacity and the entire infrastructure needed to develop an artificial intelligence (AI) ecosystem are gradually being built. In 2025, a significant portion of AI-related investment by mega-cap technology companies was financed through balance-sheet cash. Toward the end of 2025, however, an increasing number of so-called hyperscalers turned instead to the investment-grade corporate bond market.

«Themes such as digital assets, rare earths, and space exploration are more strongly represented in convertible bonds than in any of the major equity indices.»

Unless there is a reversal in AI investment—which currently appears unlikely—part of this capital demand should shift to the convertible bond market in 2026, alongside continued deal flow from smaller, high-yield, or unrated issuers in this space.

In addition, new themes are enriching the convertible bond market. High-performing themes such as digital assets, artificial intelligence, rare earths, and space exploration are much more strongly represented in convertible bonds than in any of the leading equity indices. Overall, the market currently shows a healthy balance between growth and quality themes.

The return of discipline

Secondary market activity also reached record levels last year. Trading volume in the United States exceeded USD 800 billion (2024: USD 665 billion). This development is particularly important for future market dynamics, as it signals increased interest and participation in convertible bonds and reflects an improved ability to efficiently execute large transactions.

The return of discipline in this hybrid asset class also argues for a continuation of the rally. From December 2021 to May 2025, total outflows amounted to USD 41 billion, or more than 40 percent of total assets under management controlled by long-only investors at the beginning of the period. Hedge funds filled the gap, currently dominate the market, and there are no signs of a slowdown or reversal in their inflows.

With hedge funds playing a larger role, pricing discipline for new issues and secondary-market convertibles has improved. Moreover, a predominantly professional investor base continues to result in attractive terms for new issuance. Long-only flows only reversed a few months ago, and given the duration and magnitude of the preceding bear market, this new wave of inflows could persist for years.

«The current situation is reminiscent of the ‘golden age’ of the convertible bond market.»

Low absolute volatility levels are another positive factor. The benchmark VIX index closed 2025 at 15 percent, the lowest monthly reading since November 2024.

A natural consequence of low realized volatility is that implied volatility for convertible bonds drifts higher on the «expensive/cheap» spectrum. In absolute terms, however, all regions except Europe ended 2025 with implied volatility at similar levels (United States, Japan) or lower levels (Asia) compared with the beginning of the year.

Returns of 6 to 7 percent appear realistic

In terms of size, liquidity, and efficiency, the current situation in the convertible bond market strongly resembles the period from 2003 to 2007—the most recent «golden age.» It was a time when large transactions were easy to execute, investors seeking convexity found ample opportunities, and hedge funds and cross-asset investors kept valuations within a reasonable range.

Against this backdrop, achieving at least the long-term average return of around 6 to 7 percent in 2026 appears realistic. If equity markets continue to perform very well, double-digit returns may once again be possible in certain segments. This view is supported by the fact that, following the end of an interest-rate hiking cycle, convertible bonds have consistently delivered above-average performance over the past 30 years.

Oliver Gasser is CEO and Head of Portfolio Management at Bantleon Convertible Experts in Zurich.

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