Why convertible bonds reign supreme

By Antoine Lesné, head of ETF Sales Strategy EMEA at State Street Global Advisor

Mid-October 2014 marked the trough of the equity market last year.

After a year of ups and downs we look at how convertible bonds have performed on an absolute and relative basis through market rallies and stormy weather; having behaved markedly as expected.

Year to date, we’ve been through three main cycles:

The Good (15 October 2014 – 28 April 2015)

A relief rally characterised the remainder of the fourth quarter of 2014, interrupted by concerns over Russia on the back of weakening oil prices.

A mildly positive outlook for the global economy greeted the start of 2015, along with expectations that the US Federal Reserve would abandon its ultra-loose policy by starting to increase interest rates and that the European Central Bank would officially announce a programme of quantitative easing.

At that time, a Chinese slowdown was a remote possibility but one that was certainly not priced fully into the markets. The Syriza Party came to power in Greece but this did not initially disrupt the financial markets.

The Bad (29 April – 10 August 2015)

Volatility returned and, in the euro bond markets, early talk of tapering sent German bund volatility into orbit. The Chinese A-Share bubble deflated despite efforts by the government to halt the trend.

Greece’s negotiations over a third bailout package stalled with a last-minute call for a referendum; after an eleventh-hour agreement on 13 July, the markets enjoyed a respite until the early part of August.

The Ugly (11 August 2015 to date)

The People’s Bank of China introduced a ‘managed float’ regime in August in an effort to halt the depreciation of the Chinese yuan, triggering an emerging market currency rout. Since then, volatility has spiked and market movements have been acute. The equity market correction that began in August has continued, with the Fed choosing to keep rates on hold in September.

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