Convertible bonds stand out as a rare high-quality equity-linked asset within public bond offerings, combining both bond-like and equity-like characteristics. Their price curve is monotonically increasing and convex relative to conversion value, making them suitable for investors with varying risk appetites.
For fixed-income-plus funds, the allocation value of convertible bonds is significant, primarily reflected in: ① their scarce equity-linked nature among existing public bond varieties; ② their unique asset positioning between stock and bond allocations; ③ providing bond investors with effective exposure to small- and mid-cap style equities; ④ the long-term upward trend of convertible bond indices, with the double-low index further leveraging the variety's advantages to enhance returns. Additionally, convertible bonds demonstrate strong correlation effects with other assets. However, the current supply-demand imbalance has driven valuations to elevated short-term levels, and allocation opportunities still require waiting for prices to revert. This article is the fourth in the "Multi-Asset Fixed-Income-Plus Series Reports," focusing on the fundamental attributes, asset characteristics, and allocation significance of convertible bonds in the "fixed-income-plus" context.
From an asset characteristics perspective, the convertible bond price curve is a monotonically increasing and convex curve relative to conversion value, with bond-biased, balanced, and equity-biased zones each suited to different risk appetites. In the short to medium term, convertible bond prices are driven by both underlying stock movements and covenant events—the former continuous, the latter discrete. From a long-term perspective, both valuation and conversion value exhibit mean-reverting characteristics: downward revision clauses provide upward correction force for conversion value, while forced redemption clauses cause high-priced targets to exit, allowing conversion value to revert downward without harming the index. Together, these forces constitute the mean-reverting nature of convertible bond assets. Based on the convex curve characteristics and disciplined "buy low, sell high" approach, the double-low convertible bond strategy has delivered excellent long-term performance. In the coming two years, many individual bonds face maturity, and historically the convertible bond market has not experienced a similar concentrated maturity phase. Multiple factors—scarcity, redemption risk, and premium compression near maturity—may become阶段性 dominant forces in the market. Therefore, convertible bond research and investment in the next two years may require new framework support.
From an allocation value perspective, convertible bonds offer multiple advantages in multi-asset "fixed-income-plus" portfolios. ① As a scarce equity-linked asset among public bonds, convertible bonds are counted toward bond positions for most fixed-income-plus funds without occupying limited equity quotas. ② Convertible bonds have a unique positioning between stocks and bonds, performing best during the initial transition from bond bull to stock bull markets. ③ They are an effective way for "fixed-income-plus" funds to increase exposure to small- and mid-cap style equities. ④ The CSI Convertible Bond Index has demonstrated long-term historical advantages, suitable for long-term allocation by "fixed-income-plus" funds, while the double-low index further enhances risk-adjusted returns on top of the convertible bond index. Moreover, from a risk parity perspective, convertible bond assets can generate favorable correlation effects with other "fixed-income-plus" assets.
However, the core contradiction currently facing convertible bond assets is elevated valuations under supply-demand imbalance. Based on the inherent advantages of the convertible bond variety and the certain Smart Beta characteristics in the compilation of the convertible bond index and double-low index, when conversion value and absolute price are near historical midpoints, favorable allocation value can be achieved. Currently, conversion value has returned to near its volatility midpoint, and active allocation can be pursued once prices revert.
Convertible bond valuation compression risk: Convertible bond valuations are influenced by liquidity conditions, supply节奏, and risk appetite, and are currently at historically high levels. If "fixed-income-plus" scale expansion slows, convertible bond supply recovers, or equity market sentiment weakens, valuations may undergo systematic compression. At that point, convertible bond prices would face dual pressure from underlying stock declines and valuation shifts downward, and strategies relying on valuation reversion, such as double-low, would also face significant drawdowns.
Underlying stock volatility risk: Underlying stock movements are the dominant variable for short- to medium-term convertible bond prices. If the equity market undergoes significant adjustment, conversion value declines accordingly, and convertible bond prices fall in tandem; for high-priced bonds with strong equity characteristics, bond floor protection is limited, and drawdowns may approach those of the underlying stock.
Covenant and forced redemption risk: Forced redemption clauses constrain the upside potential of convertible bonds. For bonds with high conversion premiums, once the issuer announces the exercise of forced redemption rights, the premium will rapidly converge toward zero. If holders fail to convert or sell in time, they may face significant losses.
Supply-demand imbalance and liquidity risk: The outstanding scale of convertible bonds has declined by approximately 45% since the end of 2023, with both the number of individual bonds and market size contracting simultaneously. The decline in market capacity and average daily turnover may reduce rebalancing efficiency; if concentrated redemptions occur, liquidity contraction could further amplify price volatility.
Credit and delisting risk: With the emergence of convertible bond defaults and delisting cases, the market's expectation of "principal protection at the bottom" for convertible bonds has been broken. Bond floor protection for low-quality, low-priced bonds is unreliable. If the underlying stock's fundamentals deteriorate or the issuer loses solvency, related bonds may experience significant valuation markdowns or even principal losses.
Concentrated maturity risk: 2027 and 2028 will see peak convertible bond maturities, with annual maturity scale exceeding 100 billion yuan. Historically, the convertible bond market has not experienced a similar concentrated maturity phase. The proportion of maturity redemption versus forced redemption conversion is uncertain, which may alter the valuation structure and pricing paradigm of convertible bonds.
Securities research report title: "Convertible Bonds: Scarce High-Quality Equity-Linked Assets Among Public Bonds, Awaiting Supply-Demand Rebalancing—Multi-Asset Fixed-Income-Plus Series Report Four" Public release date: September 24, 2026 Report publishing institution: China Securities Co., Ltd. Report analysts: Zeng Yu, SAC Number: S1440512070011; Zhou Bowen, SAC Number: S1440520100001
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