The recent rise in the A-share market has brought along a significant boost to the convertible bond market, revealing attractive opportunities for medium to long-term investorsOn February 13, the China Securities Index for convertible bonds hit 428.82 points, marking a new peak in the current rebound phase since September 2024. This upward trend signals increasing investor confidence and suggests a shift in market dynamics.

As the convertible bond market continues to demonstrate resilience, it has caught the attention of public mutual funds and other medium to long-term capital investors, who are now substantially increasing their exposureAccording to data from Wind, by the end of 2024, public mutual funds had drawn close to 290 billion RMB in convertible bonds, reflecting a quarter-on-quarter increase of 2.27% since the third quarter of 2024. This uptick not only illustrates a growing conviction in the convertible bonds' performance but also points to a strategic pivot towards securing steady returns amidst market volatility.

Market analysts suggest that despite the valuation adjustments for convertible bonds being largely accomplished, there remains a spectrum of structural opportunitiesThe recalibrating landscape, bolstered by a reassessment of tech stocks—especially those within artificial intelligence—and an abundant liquidity environment, has created an atmosphere ripe for investmentInvestors are urged to remain vigilant about the impacts of large-cap convertible bonds, particularly those susceptible to forced redemptions, which may prompt significant fund readjustments.

The historical performance of the convertible bond index has been notably promising since its ascent began on September 24, 2024. To date, this index has recorded an impressive cumulative growth rate of 17.44%. This trend is not merely a recent phenomenon; it has persisted despite broader fluctuations in the A-share market, highlighting the inherent strength of the convertible bond segment

Advertisements

In fact, since the start of 2025, the convertible bond index has surged more than 3%, showcasing its capability to thrive even in challenging conditions.

Liu Yang, a fixed income manager at HSBC Jintrust Fund, attributes the strength of the convertible bond market to several fundamental catalysts, including newly released opinions on mergers and restructuring as well as initiatives aimed at enhancing financial frameworksThese developments bolster not only equities but also assist in the sustained progress of convertible bondsLiu further notes that the intrinsic characteristics of convertible bonds—blending equity-like advantages with the stability of fixed income—afford investors a more robust shield against market fluctuations, making them increasingly appealing to those seeking reliable yield amidst uncertain economic terrains.

On the supply side, Liu points out that declining issuance coupled with a wave of existing bonds reaching maturity has led to an overall shrinkage in the marketThis scarcity enhances the attractiveness of convertible bonds, particularly in a market characterized by significant varianceAs strong tech stocks convert their bonds into equity, the availability of high-quality convertible bonds in segments like banking decreases, thus amplifying the perceived value of these investments.

Research from Huachuang Fixed Income Team echoes the sentiment that both equity and bond valuations for convertible bonds have reached high pointsCurrent valuations rely heavily on bullish expectations for equity markets, suggesting a possibility of corrections aheadThey recommend a dual low strategy as a potential safeguard in the impending shifts of the investment landscape.

Public mutual funds and other institutional investors are engaging more actively in the convertible bond market due to its robust performanceAs per Wind's statistics, by the end of 2024, mutual funds held convertible bonds worth 287.68 billion RMB, up from 281.29 billion RMB at the end of the third quarter, showcasing a notable interest in this asset class

Advertisements

Notably, a significant shift has been observed in 2024, with passive investment through convertible bond ETFs rising dramatically; the ETF's total net assets soared from 6.63 billion RMB at the beginning of the year to 43.86 billion RMB by year-endThis transition indicates a wider acceptance of passive strategies among investors traditionally focusing on active management.

Furthermore, insurance companies have also increased their allocations to convertible bondsBy December 2024, the portion of convertible bonds held by insurance entities was recorded at 8.48%, a rise of 2 percentage points from the previous yearNotably, insurance funds display a characteristic of stable holding patterns with low turnover rates; they are inclined to boost their positions in subdued market zones, prioritizing higher credit quality assets that yield static returnsGiven the recent decline in sovereign debt yields, which fell to record lows below 1.67% for ten-year bonds, insurance funds have showcased a tendency to diversify into convertible bonds to enhance returns.

This ongoing trajectory of inflating convertible bond investment is likely to be further galvanized by recent intervention policies highlighted in a collaborative release by the Central Financial Office and five other governmental departmentsThe plan stipulates an increase in commercial insurance funds' A-share investments and aims to stabilize their investment profiles over extended periodsMoreover, it specifies an upsurge in the scale and proportion of equity funds among investing products, while also prompting publicly traded firms to amplify share buyback activitiesThis multi-pronged approach seeks to channel incremental capital into the equity landscape.

The push to facilitate mid-to-long-term capital investments in the market could have positive ramifications for the convertible bond sectorResearch from Minsheng Securities posits that long-term investors often focus on sustainable returns, which can minimize speculative maneuvers and enhance overall market stability

Advertisements

Advertisements

Advertisements