AI-Driven Investor Appetite Reduces Safeguards in Convertible Bonds
Investors seeking exposure to the artificial intelligence boom are increasingly forgoing traditional safeguards in convertible bonds, leading to a risk profile not seen since the pandemic. With coupons on new deals falling toward zero, investors are betting that gains from underlying stocks will compensate instead of relying on income protection if shares decline. This trend has pushed the market closer to equity-like behavior, with an average delta sensitivity at its highest level since 2021—when companies like Peloton and Beyond Meat issued high-risk convertibles. Despite parallels in risk-taking, investors argue that today’s environment is different due to more stable interest rates and stronger fundamentals among issuers. Tech firms have driven global convertible bond issuance this year to $147 billion, surpassing the 2021 record mid-year. Major deals include those from CoreWeave Inc., Lenovo Group Ltd., and Nebius Group NV, which recently raised $4.5 billion with near-zero coupon notes.
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