Equities Surge, Volatility Subsides, and Convertibles Shine
May was a robust month for equity markets on both sides of the Atlantic. The EuroStoxx 50® Total Return advanced by 5.06%, while the S&P 500® Total Return climbed 6.29%. These gains reflect a broader trend of strength in European equities this year, with the region’s markets continuing to outpace many global peers, buoyed by easing monetary policy and renewed industrial activity,
Market volatility moderated in May. The VStoxx® index, which measures implied volatility in European equities, declined to finish the month at 19.2%. Credit markets also strengthened, with the iTraxx Crossover® (S43) tightening from 350 to 300 basis points. Five-year interest rates edged higher from 3.73% to 3.96%, while high-yield CDX spreads narrowed significantly, falling from 408bps to 351bps. This environment of declining volatility and tightening credit spreads provided a supportive backdrop for risk assets.
Convertible Bond Arbitrage
The European primary convertible bond market saw renewed momentum, with €2.5bn in new issuance for the month and €5.9bn year-to-date, more than double the same period last year. Notably, Goldman Sachs and JP Morgan brought nondilutive convertible bonds into ASML and Ferrari respectively, which rather tellingly came to market at expensive implied volatilities.
Conversely, Vonovia and Euronext issued their inaugural convertible bonds, both of which were met with exceptional demand and were oversubscribed multiple times. Encouragingly, the uptick in new issuers highlights growing corporate confidence in the use of convertibles as a financing option for European companies.
While the secondary market remained subdued, the tightening in credit spreads and lower implied volatilities shaped the trading environment. In the US, late in May, a surge in new issuance, including a notable $2.5bn jumbo deal from DoorDash, began to put pressure on secondary market valuations. We expect this dynamic to set the stage for an active and dynamic summer ahead.
Volatility Trading
Following April’s turbulence, markets were calmer in May. Volatility declined across the curve, with short-dated implied volatility compressing and realised volatility remaining subdued. As macroeconomic uncertainty persists, our focus remains on identifying attractively priced volatility opportunities.
Equity Strategies
Notable event-driven opportunities shaped equity strategies in May.
The US Steel takeover by Nippon Steel was revived following trade negotiations between the US and Japan. In April, President Trump requested a new CFIUS review of the deal. While the committee was divided, the president ultimately determined that an agreement between the Japanese and US steelmakers would benefit both countries, especially given Nippon Steel’s increased commitments. However, the exact terms of the deal have yet to be confirmed.
In Europe, the minority takeover of Atacadao by Carrefour was finalised on 30th May. The complexity of the transaction, spanning Brazil and France, and involving foreign exchange considerations as well as the use of options, meant there was limited participation from the usual risk arbitrageurs, allowing firms with the required expertise to build substantial positions at highly attractive returns that wouldn’t normally be possible.
Outlook
With equity markets buoyant, volatility subdued, and credit conditions supportive, we anticipate an active summer across both primary and secondary markets. Navigating this environment will require the ability to identify and exploit pockets of dislocation created by special situations, evolving macro narratives, and episodic volatility spikes.
Our focus remains on disciplined risk management and dynamic positioning, with an eye toward opportunities that may emerge as primary market activity accelerates and liquidity dynamics evolve.
Risk Warning
The views and opinions expressed are the views of Boussard & Gavaudan and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.
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