Global Convertible Bonds for Navigating a Rising-Rate Environment

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Strategy Espresso

Global convertible bonds, with their embedded equity call options coupled with lower interest rate sensitivity, have demonstrated the attributes of a resilient asset class. Convertibles provide an alternative route to navigating the current financial climate, where volatility is expected to rise as central bank liquidity recedes and bond yields continue to rise. What Makes Convertible Bonds Appealing to Investors? Interest Rate Sensitivity. The Thomson Reuters Qualified Global Convertible Bond Index Currently has an effective weighted duration of 3.9 years.1 Significant moves in interest rates tend to affect convertible bonds differently to that of conventional nominal debt, given the special dynamic of the embedded equity option and strong convexity of the instrument. For that reason, investors look instead at another measurement in order to fairly assess the impact of changes in yields to the changes in value of the convertible bond. This measure of sensitivity to interest rate is known as the convertible bond’s Rho, also commonly called the ‘Bond Delta’ (the correlation of movements between the convertible price and interest rates).