Performance
The U.S. convertible market finished the first quarter of 2026 with a remarkable performance. What made the performance noteworthy was the benchmark’s 3.72% rise despite not only a decline in equity markets but also a coincident rise in interest rates and a corresponding drop in the high yield and Treasury bond markets. Generally, a drop in both equity and bond markets would make a decline in convertible securities a near certainty. However, several unusual occurrences in the first quarter allowed convertibles to outperform nearly every other asset class, a continuation of the trend we experienced in 2025. For the first quarter, the ICE BofA U.S. Convertibles Index’s 3.72% advances compares to the 4.35% decline in the S&P 500 and the 6.96% loss in the NASDAQ. The smaller cap Russell 2000 posted a small gain of .92% for the quarter which provided a small tailwind to the convertible market, as many convertible securities in the Index emanate from small and mid-cap issuers. The main driver of convertible performance, however, was the sharp rise in several large Index constituents seen as beneficiaries of the buildout of A.I. data centers. The Index’s largest constituent, Lumentum Holdings, a manufacturer of optical equipment used in data transmission, rose 90% in the first quarter alone after gaining more than 300% in 2025. In addition, data storage companies, Seagate Technologies and Western Digital, two other large Index constituents, rose 42% and 57% respectively, in the first quarter following very strong advances in 2025 as well. In addition, the U.S. convertible market was not burdened by the weak performance of the so-called Magnificent Seven stocks which have an outsized impact on the large cap equity indices. The stocks of all seven companies posted first quarter declines and enhanced the relative performance of the U.S. convertible market versus equity indices such as the S&P 500 and the NASDAQ Composite.
While the first quarter gains versus equites are remarkable, they have been relatively concentrated in the bonds of a few companies tied to the buildout of data centers, data storage, and power demand related to the needs of AI infrastructure. It may be difficult for those gains to broaden out in an environment of high energy prices, higher interest rates, and concerns related to private credit investments. However, if the war in the Middle East can be ended relatively quickly on terms seen as favorable to the U.S., a broad rally in equities and equity-linked securities such as convertibles is likely.
Issuance
For the first quarter of 2026, new issuance totaled $26.0 billion (from Bank of America data), ahead of last year’s $15.8 billion of new issuance for the same period. Issuance totals in the first quarter were impacted by Oracle Corporation’s $5 billion convertible preferred share issue, the proceeds of which will be used to fund its buildout of AI computing and data storage facilities. Additional issuance came from companies seeking to refinance existing convertible debt. We expect the pace of new issuance to remain strong through the balance of the year as numerous bonds that came to the market during the pandemic-fueled issuance spree of 2020- 2021 approach maturity and need to be refinanced. However, a prolonged slump in equities may damper issuance somewhat from other companies.
Positioning and Outlook
We are surprised by the convertible market’s strong performance so far this year particularly within the backdrop of falling stock and bond markets. Surprised but pleased. Despite the narrow scope of the convertible market’s advance, we have kept pace with the Index even with our relatively conservative portfolio positioning which outperformed the Index on most down days. Some of our large data center and storage holdings were benchmark winners, which rose by avoiding anything linked to cryptocurrency such as MicroStrategy and Coinbase, which continue to fall in value even after last year’s very poor performance. We remain overweight in the Healthcare, Consumer Staples, Information Technology sectors, market-weighted the Communication, Consumer Discretionary, Real Estate, Energy sectors, and underweight Financials, and Utilities. We believe that in the absence of a prolonged spike in energy prices, the economy can maintain its pace of low single- digit GDP growth combined with relatively low, sub-5% unemployment. We continue to believe that our process, which emphasizes strong company fundamentals and reasonable valuation, will outperform over a complete market or economic cycle.
*(performance data from Bloomberg)
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Past performance is not indicative of future results.
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SOURCE INFORMATION
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INDEX DEFINITIONS
The ICE BofA All U.S. Convertibles Index is an unmanaged index that consists of convertible bonds traded in the U.S. dollar denominated investment grade and non-investment grade convertible securities sold into the U.S. market and publicly traded in the United States. The Index constituents are market value weighted based on the convertible securities prices and outstanding shares, and the underlying index is rebalanced daily.
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