Convertible bond investors chasing the artificial intelligence boom are increasingly abandoning traditional investor protections, pushing risk appetite in this market to levels not seen since the pandemic-fueled frenzy of 2021.
Global convertible bond issuance has already reached $147 billion this year, a surge of more than 50% compared to the same period last year, and has already exceeded the full-year record set in 2021. AI-related firms such as CoreWeave and Nebius Group have flocked to this market, with some newly issued bonds carrying coupons near zero as buyers bet that rising share prices of the issuers will replace interest income as the primary source of returns.
This trend is eroding one of the core attractions of convertible bonds — the interest income that provides a buffer for investors when the underlying stock declines. The average delta, a key metric measuring how closely a convertible bond tracks the equity, currently stands at approximately 64%, the highest level since 2021. Meanwhile, tech stocks have experienced turbulence in recent months over bubble concerns, making this wager increasingly risky.
Zero-Coupon Bonds Resurface, Equity Sensitivity Hits Five-Year High
Convertible bonds give investors the right to convert the bond into shares at a specific price, combining debt and equity characteristics. When coupons approach zero, holders effectively forfeit "income during the waiting period," staking their entire return on the performance of the underlying stock.
According to Bloomberg data, the average delta in the convertible bond market is currently around 64%, sitting in the highest range since 2021. Nicolas Cremieux, head of convertible bonds at Mirabaud Asset Management, noted that in recent years convertibles offered fairly substantial yields, allowing investors to "enjoy waiting returns," but now they are instead drawn to equity options.
The lessons of 2021 remain vivid. At that time, companies like Peloton Interactive and Beyond Meat issued billions of dollars in convertible bonds with 0% coupons. When interest rates soared and stock prices collapsed, investors were left holding bonds that paid no interest and offered no collateral, suffering severe losses.
AI Companies Dominate Issuance, Breaking Historical Records
Technology firms are the primary drivers of this issuance wave.
CoreWeave, which provides software runtime services for AI applications, and Lenovo Group, a device manufacturer, have both completed large-scale convertible bond financings. Just last week, Nebius Group NV, which focuses on AI cloud platforms, raised $4.5 billion through the convertible bond market, which combined with a prior issuance of $9.75 billion totals over $14 billion. This offering included notes maturing in 2030 with coupons ranging from 0% to 0.5%.
Meanwhile, tech giants such as Alphabet are increasingly turning to traditional credit markets to finance infrastructure spending. Yields offered by investment-grade exchanges linked to hyperscale data centers are approaching levels comparable to junk bonds.
Concentration Risk: Multiple Exposures to the Same Theme
Some market participants remain cautious about the current momentum.
Adam Marden, a portfolio manager at T. Rowe Price, said that as the convertible bond market becomes more equity-sensitive, investors must distinguish between winners and losers rather than indiscriminately buying the entire asset class. He pointed out that AI may deliver a productivity leap, creating a "dream environment" for convertibles, but "it could also be the biggest waste of capital in human history," making it crucial to carefully scrutinize the terms and conditions of each bond and understand the protective provisions within.
Joe Wysocki, senior vice president and portfolio manager at Calamos Investments, argues that the current environment differs fundamentally from 2021. "Some form of replay is always possible, but interest rates today are in a completely different position," he said. "There are many issuers in the current convertible bond market demonstrating exceptional fundamental momentum in both revenue and profitability."
However, Stephan Bach, senior portfolio manager at Sparinvest, highlighted a deeper risk: as investors gain AI exposure through multiple channels — stocks, credit, and increasingly equity-sensitive convertibles — the experience of 2021-2022 shows that portfolios may unknowingly build highly concentrated exposure to the same underlying theme. "The key is not to avoid strong themes, but to ensure that enthusiasm for a theme does not override valuation discipline or portfolio construction principles," he said.
Comments