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Managing the Changing Waters: Difficulties in the Convertible Bond Market

Investors continuously search the ideal balance between risk and profit in the ever-changing realm of financial markets. When one compares the performance of convertible bonds against important US market indices, this search is very difficult. Using the FTSE US Focus Parity Index, this paper explores the complexity of outperforming important US equity indexes by examining implied volatilities and finally offers strategic advice for convertible bond managers.

1. FTSE US Focus Parity Index vs US Equity Indexes: Challenging Outperformance

Using the FTSE US Focus Parity Index helps one to better understand the challenge of outperforming leading US equity indexes like the S&P 500 and NASDAQ with Convertible bond issuers. Though the S&P 500 and NASDAQ have shown notable increase, especially in recent years, the returns graph shows that the FTSE US Focus Parity Index lags behind. This discrepancy is clear even with a risk-adjusted basis since the volatility of returns is quite important.


Source: B&G, Bloomberg and LSEG data as of June 14th 2024

The annualized volatility graph shows that compared to the US stock indexes, the FTSE US Focus Parity Index shows reduced volatility. But this lower volatility comes at a cost: lower returns highlight the difficulty of attaining outstanding performance with the FTSE US Focus Parity Index.

Source: B&G, Bloomberg and LSEG data as of June 14th 2024


2. Implicit Volatilities: Equity Indexes Against Convertible Bonds 

Examining the implied volatilities of various investment vehicles is absolutely crucial in determining their appeal. Compared to the average implied volatility contained in the FTSE US Focus Index, the 1-year at- the-money (ATM) implied volatilities for key US stock indexes including the S&P 500 and NASDAQ seem more appealing.

The FTSE US Focus Index usually shows a larger spread based on the graph of the implied to realized volatility. This implies that, on average, convertible bond implied volatility is more costly than that of the S&P 500 and NASDAQ. In terms of volatility points, US equity index options may thus be more affordable for investors, so emphasizing a relative drawback for the FTSE US Focus Index.


Source: B&G, Bloomberg and LSEG data as of June 14th 2024


3. Successful Recipe: Convertible Bond Management Techniques

Given the difficulties in the convertible bond market, good management calls both strategic and flexible strategy. Three main elements can help you to outperform US convertible bond managers:

a) Make investments in convictions
Investing in high-conviction ideas is crucial; this could mean focusing more than with conventional convertible bond indexes. Though having more related risks, this concentration could help managers to maximize their investment ideas and drive performance.

b) Equity Index Options Active Management
Convexity can be improved by active integration of convertible bonds with equity index call options. This approach lets managers keep alignment with the risk measures of the primary benchmark while also profiting from the growth potential of stocks.

c) Opportunist investment strategy
The convertible bond market depends much on flexibility. Depending on the market situation and environment, managers have to be able to alternate between an arbitrageur approach and an outright investor strategy. This flexibility aims to allow businesses to maximize returns by taking advantage of several market scenarios.

In essence, with the FTSE US Focus Parity Index, outperforming main US equity indexes presents difficulties mostly related to structural constraints and more volatility premiums. Convertible bond managers can overcome these obstacles and attain exceptional performance, nevertheless, by using a strategic approach stressing conviction-driven investments, active management, and strategic flexibility.


The views and opinions expressed are for informational and educational purposes only, as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example.

Past performance is no guarantee of future results. Investing involves risk; loss of principle is possible.

All information has 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, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Nothing on this communication shall be considered a solicitation to buy or an offer to sell a security, or any other product or service, to any person in any jurisdiction where such solicitation, offer, purchase or sale would be unlawful under the laws of that jurisdiction.

This communication has been issued by Boussard & Gavaudan which is composed of the following entities:
Boussard & Gavaudan Investment Management LLP (“BGIM”) is a limited liability partnership registered in England and Wales, authorised and regulated in the U.K. by the Financial Conduct Authority (“FCA”) and registered as an investment adviser with the US Securities & Exchange Commission (“SEC”). BGIM is also registered with the US Commodity Futures Trading Commission (“CFTC”) and the US National Futures Association (“NFA”) as a Commodity Pool Operator and Commodity Trading Advisor. Boussard & Gavaudan Gestion SAS (“BGG”) is registered in France as a ‘Société par actions simplifiée’ which is authorised and regulated in France by the Autorité des Marchés Financiers (“AMF”). Boussard Gavaudan America LLC (“BGA”)  is incorporated in Delaware and is registered with the SEC.


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