Equity and fixed-income markets are off to one of their worst starts in history, as investors grapple with inflation running at 40-year highs, and seemingly accelerating monthly.

Convertible bonds and volatility go hand in hand given the optionality embedded in a convertible security. At times convertibles act more like stocks and at other times more like bonds. This paper explores that concept and the thesis that higher volatility as expressed by the VIX(1) has historically been a positive for convertible bond performance relative to the S&P 500 Index and a 60% equity/40% fixed income mix(2).

The first quarter of 2022 was painful for financial markets and heartbreaking for those watching the tragic events unfolding in Ukraine. The bond market massacre, beginning last year, accelerated with 10-year U.S. Treasury yields jumping to 2.32% from a low of 0.51% in early August 2020.

Wellesley Asset Management Surpasses $3 Billion in Regulatory Assets Under Management as They Celebrate Their 30th Year Anniversary.
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1. INFLATION IS REARING ITS UGLY HEAD – IS YOUR FORTFOLIO READY?
2. DOWNSIDE PROTECTION: A CASE STUDY 
3. THE RATIONAL INVESTOR?
4. Q&A WITH THE PORTFOLIO MANAGERS

A high yield bond investor earns positive returns in three ways — clipping a coupon or current yield, an increase in value of the bond as holders enjoy the fruits of improved credit worthiness of an investment, or a fall in the general level of market interest rates.

Convertible bond investors are often frustrated with limited investment choices or options regarding convertible securities especially related to sporadic or narrow convertible issuance, or that the universe of companies and sectors with outstanding convertibles is not larger or more diverse.

The trend of lower rates accelerated beginning November 8, 2018 when 10-year U.S. Treasury bond yields began a descent that saw their yield drop from 3.23% to a recent jaw-dropping all-time low of 0.40% on March 9, 2020.

Convertible bonds are sometimes considered the “Swiss Army knife” of financial products because they can provide investors with principal protection (barring default), income, and equity-like returns.

Unlike traditional convertible bonds, the credit exposure of a synthetic remains with the issuing company, typically a bank. The equity exposure, however, is tied to the underlying company’s stock.