In the tariff storm, European convertible bonds are rising against the trend, transforming into a safe haven for funds.

After the turmoil caused by President Donald Trump's push to reshape U.S. trade policy, the almost silent convertible bond market in European capital markets is gradually becoming a safe haven for funds. A regional index tracking convertible debt securities shows that their return has exceeded 9% so far this year. This performance is partly due to bonds issued by defense companies such as Rheinmetall AG and Safran SA. This stands in stark contrast to many major global stock and bond benchmarks, with many benchmarks either in the red or having almost wiped out gains made since 2025. While convertible bonds are performing strongly, buyers are facing a shortage of supply. In 2024, the issuance of convertible bonds fell to the lowest levels in at least 25 years. Market participants say this scarcity supports demand and helps convertible bonds withstand broader market fluctuations. Now, as borrowing costs rise and traditional debt financing conditions tighten, more companies may turn to this market to meet their funding needs. Ivan Nikolov, head of convertible bonds at Fisch Asset Management AG in Zurich, said, "With widening credit spreads and rising yields on corporate bonds, CFOs are actually more inclined to consider issuing convertible bonds. We will be selective and keep an eye on this asset class globally, but we expect to see more European companies issuing such bonds." The return on European convertible bonds this year has surpassed the rise of similar indices in Asia by almost 3.2%, contrasting sharply with a 3.5% decline in the U.S. market. Its performance also easily surpasses indices tracking European investment-grade bonds, as well as the total euro-denominated return on the Euro Stoxx 600 benchmark index (including dividends). Unlike traditional bonds, convertible securities can typically be converted into stocks at a pre-agreed price upon maturity. For companies, these instruments often have lower interest costs than regular debt, but there is a risk of diluting existing shareholder equity if conversion options are exercised. For investors, convertible bonds offer exposure to stocks while providing the security of bond repayment. According to Bloomberg, there have been at least 7 convertible bond transactions in Europe this year, raising a total of 2.8 billion euros (about $3.2 billion). While this marks an improvement from last year, it is still below historical averages. These transactions include a 3 billion euro bond issued by Redcare Pharmacy NV last week, priced amidst escalating U.S.-China tariff disputes. Nikolov said the strong demand for Redcare's bond transactions indicates that "even though stock market sell-offs may prompt some potential issuers to wait for the market to calm down, the convertible bond market remains open to new issuances." The shortage of European convertible bond issuance has prompted some investment banks to design synthetic transactions to take advantage of suppressed market demand. In January, Citigroup issued a 375 million euro bond linked to Airbus SE stock, while last month JPMorgan sold a 400 million euro convertible security linked to Deutsche Post AG stock. Looking ahead, if the rising cost of borrowing continues to attract companies to consider issuing more convertible bonds, the need for investment banks to fill the market gap may decrease. Market participants note that historically, convertible bond market activity tends to increase during times of crisis. Javier Polian, head of equity-linked product issuance for Europe, the Middle East, and Africa at Citigroup, said, "Despite market corrections during the COVID-19 pandemic, many companies still issued convertible bonds. If tariffs become the new normal, companies may return to the convertible bond market for financing." It is worth noting that European convertible securities did experience a significant decline earlier this month, with returns falling by 3 percentage points before recovering, indicating that they are also not immune to market shocks. Martin Hicock, portfolio manager for the New Capital Global Convertible Bond Fund under EFG Asset Management, said that during turbulent market periods, the convertible bond market is often one of the first to recover activity. Hicock said, "We believe that in the current tumultuous and uncertain times, convertible bonds remain a valuable asset class for investors. We expect to see more new bond issuances in the coming months."