It’s been a strong year thus far for the convertible bond market, with the benchmark ICE BofA U.S. Convertible Index returning 9.6% year to date through July 31.  And in a period marked by volatility amid concerns over the impact of U.S. trade policy, the convertible market has indeed offered attractive risk-adjusted returns based on the Sharpe ratio of the ICE BofA index relative to broader equity indexes. The market displayed its historical resilience, providing limited downside when markets sold off through early April, while offering significant upside participation during the subsequent market rally into June.

One major driver of convertible returns has been the strength in mid cap growth equities, where returns have been better than both their large- and small-cap growth equity counterparts (see Figure 1). Historically, convertible returns are most highly correlated to mid-cap growth equities.

What is the outlook for convertible bonds for the rest of 2025?

The market was able to weather the volatility of the first half. But what’s ahead? Our outlook for the convertible market through the rest of the year remains quite favorable. 

Due to the strong year-to-date returns, the convertible market’s delta (a measure of the sensitivity of the price of a convertible bond to changes in the price of the underlying stock) is now in the mid-50s, up from the high 40s earlier in the year. 

While the convertible market has a higher level of equity sensitivity compared to recent history, this is still well below where the market delta has generally traded over the past 10 years. At these levels, an investor still has the potential to garner highly attractive risk-adjusted returns relative to history. 

What are the key signals for convertibles for the second half of the year?

The convertible market is just now eclipsing its prior peak seen in November 2021, as compared with other major equity indices that are trading well above their prior peak. This suggests that the market recovery for convertibles may be in its early stages.

And with a market delta in the mid-50s, as mentioned earlier, history would also suggest strongly positive forward returns over a 3-year period: 

What are the key takeaways for convertible bond investors?

The convertible market’s strong returns so far this year are a good reminder of the asset class’s ability to deliver compelling risk-adjusted returns in a volatile environment. We believe there is still additional upside in convertibles going forward as the market recovery continues. 

To take advantage in this current market environment, we believe that a flexible, opportunistic approach is most appropriate. Lord Abbett has been managing convertible securities for over five decades (dating back to 1971) as a component of our multi-sector strategies.  The depth of our analytical and security valuation resources across innovation equity, as well as credit research, empowers the team to utilize an unbiased approach that can capture opportunities across the credit and delta spectrum, which we believe is crucial as it offers the potential to drive alpha in today’s market.