The first quarter of 2022 proved to be challenging for most fixed income sectors, and convertible bonds were not immune from the volatility. Year to date through March 31, global convertibles had returned -5.81% — their third-worst quarterly showing since the 2008 global financial crisis — compared to -5.54% for global high-yield bonds and -6.90% for global investment-grade corporates.1 Sector composition particularly hurt global convertibles, including a sharp correction across technology (which makes up 23.8% of the convertibles universe) in response to concerns about the potential impact of higher interest rates on tech companies' growth prospects; and a rally in the energy sector (4.0% of the convertibles universe), fueled in part by supply disruptions from the war in Ukraine.
Looking ahead, however, we continue to believe global convertibles are likely to outperform other fixed income sectors over an investment time horizon of approximately two to three years.
Our bullish secular outlook for global convertibles is based on five key considerations
The "bear case" risk factors that we're watching most closely these days include:
However, it's always possible that a severe economic shock could cause global central banks to delay their monetary policy tightening efforts or even reverse course on their planned interest-rate hikes, which would likely help alleviate the risk of a global recession.
Today's uncertain landscape is not without potential risks for convertible bond investors to be mindful of, but as of this writing, we are cautiously optimistic on global convertibles' performance prospects going forward. We will update our views if/as market conditions warrant in the months ahead.
1Asset classes are proxied by the following indices: Global convertibles: ICE BofA Global 300 Convertible Index; Global high yield: ICE BofA Global High Yield Index; Global investment-grade corporates: ICE BofA Global Corporate Index. Sources: Bloomberg, BofA Global Research. Data as of 31 March 2022. | 2Convexity is a measure of the curvature in the relationship between fixed income asset prices and their current yields, showing how a bond's duration changes as its yield changes. For example, a bond is said to have positive convexity if its duration increases as its yield decreases. Positive convexity generally leads to greater increases in bond prices.
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