Performance

With one week remaining in the third quarter of 2026, the U.S. convertible market has pulled back from the highs reached in early June but is still up nearly 15% for the year despite sharply higher energy prices and rising Treasury bond yields. Through September 23, the ICE BofA U.S. Convertible Index is up 14.93% for the year, which compares to advances of 13.51%, 16.41%, and 15.51% for the S&P 500, NASDAQ Composite, and Russell 2000 Indices, respectively.1 Typically, we expect convertible securities to participate in 60-80% of the upside of equities. This year’s broadly comparable upside participation is largely the result of the large weighting—38% at June 30— to the Information Technology sector in the U.S. convertible universe2. Within the IT sector, several securities, Lumentum Holdings, Seagate Technology, and Western Digital, tied to the buildout of AI data centers have increased dramatically year-to-date, having a positive impact on Index returns.  We estimate that nearly one-quarter of the convertible benchmark’s weighting has some connection to the development of AI, either directly through the construction of data centers, manufacture of processors used in those data centers, or more tangentially, by producing fuel or electric generation, a portion of which may be used to power these data centers.  In the third quarter we pared back our exposure to to several large AI benchmark leaders, as the appreciation in value resulted in outsized position sizes and the increase in price to multiples of their original issue price, eliminated any downside mitigation that an investor would expect in a convertible note, as these holdings became equity equivalents.

Issuance

New issuance for the first eight months of 2026 is proceeding at a record pace. Through the end of August, $111 billion of new convertible securities came to market in the U.S. compared to $65 billion at the same point in 2025.3 Keep in mind that 2025 itself was a record year for convertible issuance. Through the first four weeks of September, over $9 billion of new issuance has come to market including a $3.7 billion bond offering from Coreweave, Inc. a builder and owner of data centers leased to developers of AI data models. This was Coreweave’s second large issuance in 2026, with the company bringing a $4 billion convertible issue to market in April. We have not purchased either one of these securities as we have concerns about Corweave’s business model and whether some of its large customers may one day become competitors. In addition to passing on Corewave’s offerings, we have participated in relatively few new issues, as we have concerns about the equity valuations of many of the companies offering bonds as well as the terms of the bonds themselves, which frequently have very low or in some cases, no coupons, and large conversion premiums of 40 -50%. (Conversion premium is the appreciation of the common equity required before it becomes advantageous to convert the bond to common shares.)

Positioning and outlook

The strong year-to-date performance of the convertible market occured against the backdrop of rising interest rates and a three-month spike in energy prices. While the market rise has some measure of speculation, much of the gains are rooted in the rise in corporate earnings.  Despite the narrow scope of the convertible market’s advance, we have generally kept pace with the Index even with our relatively conservative portfolio positioning which outperformed the Index on most down days. We have benefitted from our holding of large benchmark winners in the AI category. We remain overweight the Healthcare, Consumer Staples, and Information Technology sectors, market-weighted the Communication, Consumer Discretionary, Real Estate, and Energy sectors, and underweight Financials, and Utilities. We believe that 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.

1. Data source: Bloomberg
2. ICE BofA US Convertible Index
3. Data source: Bank of America 

 

IMPORTANT DISCLOSURE

Availability of products and services provided by MacKay Shields may be limited by applicable laws and regulations in certain jurisdictions and this document is provided only for persons to whom this document and the products and services of MacKay Shields may otherwise lawfully be issued or made available. None of the products and services provided by MacKay Shields are offered to any person in any jurisdiction where such offering would be contrary to local law or regulation. This document is provided for information purposes only. It does not constitute investment advice and should not be construed as an offer to buy securities. The contents of this document have not been reviewed by any regulatory authority in any jurisdiction. All investments contain risks and may lose value and these materials do not undertake to explain all of the risks associated with any investment strategy referred to herein. Clients and investors should not invest in any strategy referred to herein unless satisfied that they and/or their representatives have requested and received all information that would enable them to evaluate the merits and risks thereof. Any forward-looking statements speak only as of the date they are made, and MacKay Shields assumes no duty and does not undertake to update forward looking statements. Any opinions expressed are the views and opinions of certain investment professionals at MacKay Shields which are subject to change without notice. There may have been, and may in the future be, changes to the investment personnel responsible for the management of the strategy(ies) described herein, as well as changes to the investment process utilized by such investment personnel. Past performance is not indicative of future results.

At the time of writing, MacKay Shields LLC maintains investments in the securities, issuers and/or companies cited herein. References to such securities, issuers and/or companies for educational and informational purposes only, and are intended to convey factual information and current market conditions. Such names are not intended, nor should they be construed as, a recommendation to buy and sell any individual security.

Information included herein should not be considered predicative of future transactions or commitments made by MacKay Shields LLC nor as an indication of current or future profitability. There is no assurance investment objectives will be met.

Past performance is not indicative of future results.

At the time of writing, MacKay Shields LLC maintains investments in the securities, issuers and/or companies cited herein. References to such securities, issuers and/or companies is for educational and informational purposes only, and are intended to convey factual information and current market conditions. Such names are not intended, nor should they be construed as, a recommendation to buy and sell any individual security.

NOTE TO UK AND EUROPEAN UNION AUDIENCE

This document is intended only for the use of professional investors as defined in the Alternative Investment Fund Manager’s Directive and/or the UK Financial Conduct Authority’s Conduct of Business Sourcebook. To the extent this document has been issued in the United Kingdom, it has been issued by NYL Investments UK LLP, 200 Aldersgate Street, London UK EC1A 4HD, which is authorised and regulated by the UK Financial Conduct Authority. To the extent this document has been issued in the EEA, it has been issued by NYL Investments Europe Limited, 77 Sir John Rogerson's Quay, Block C Dublin D02 VK60 Ireland. NYL Investments Europe Limited is authorized and regulated by the Central Bank of Ireland (i) to act as an alternative investment fund manager of alternative investment funds under the Alternative Investment Fund Managers Directive (Directive 2011/61/EU) and (ii) to provide the services of individual portfolio management, investment advice and the receipt and transmission of orders as defined in Regulation 7(4) of the AIFMD Regulations to persons who meet the definition of “professional client” as set out in the MiFID Regulations. It has passported its license in additional countries in the EEA.

This document only describes capabilities of certain affiliates of New York Life Investment Management and/or MacKay Shields LLC. No such affiliates will accept subscriptions in any funds not admitted to marketing in your country or provide services to potential customers in your country, including discretionary asset management services, except where it is licensed to do so or can rely on an applicable exemption.

MacKay Shields LLC is a wholly owned subsidiary of New York Life Investment Management Holdings LLC, which is wholly owned by New York Life Insurance Company. "New York Life Investments" is both a service mark, and the common trade name of certain investment advisers affiliated with New York Life Insurance Company. Investments are not guaranteed by New York Life Insurance Company or New York Life Investments.

NOTE TO CANADIAN RECIPIENTS

The information in these materials is not an offer to sell securities or a solicitation of an offer to buy securities in any jurisdiction of Canada. In Canada, any offer or sale of securities or the provision of any advisory or investment fund manager services will be made only in accordance with applicable Canadian securities laws. More specifically, any offer or sale of securities will be made in accordance with applicable exemptions to dealer and investment fund manager registration requirements, as well as under an exemption from the requirement to file a prospectus, and any advice given on securities will be made in reliance on applicable exemptions to adviser registration requirements.

Information included herein should not be considered predicative of future transactions or commitments made by MacKay Shields LLC nor as an indication of current or future profitability. There is no assurance investment objectives will be met. Past performance is not indicative of future results.

NOTE TO JAPANESE RECIPIENTS

In Japan, this is issued by New York Life Investment Management Asia Limited (Financial Instruments Business Operator, Kanto Local Finance Bureau (FIBO) No. 2964, Member of the Investment Management Association of Japan and the Type 2 Financial Instruments Firms Association) for institutional investors only. As costs and/or fees to be borne by investors vary depending on circumstances such as products, services, investment period and market conditions, the total amount nor the calculation methods cannot be disclosed in advance. All investments involve risks, including market fluctuation and investors may lose the principal amount invested. Investors should obtain and read the prospectus and/or information set forth in Article 37-3 of the Financial Instruments and Exchange Act carefully before making investment decisions.

MacKay Shields LLC is a wholly owned subsidiary of New York Life Investment Management Holdings LLC, which is wholly owned by New York Life Insurance Company. "New York Life Investments" is both a service mark, and the common trade name of certain investment advisers affiliated with New York Life Insurance Company. Investments are not guaranteed by New York Life Insurance Company or New York Life Investments.

SOURCE INFORMATION

“Bloomberg®”, “Bloomberg Indices®”, Bloomberg Fixed Income Indices, Bloomberg Equity Indices and all other Bloomberg indices referenced herein are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indices (collectively, “Bloomberg”) and have been licensed for use for certain purposes by MacKay Shields LLC (“MacKay Shields”). Bloomberg is not affiliated with MacKay Shields, and Bloomberg does not approve, endorse, review, or recommend MacKay Shields or any products, funds or services described herein. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to MacKay Shields or any products, funds or services described herein.

All ICE Data indices referenced herein (each such index, the “Index”), are products of ICE data indices, LLC (“ICE Data”), and are used with permission. ICE® is a registered trademark of ICE Data or its affiliates, and BofA® is a registered trademark of Bank of America Corporation licensed by Bank of America Corporation and its affiliates (“BofA”) and may not be used without BofA’s prior written approval. ICE Data, its affiliates and their respective third party suppliers disclaim any and all warranties and representations, express and/or implied, including any warranties of merchantability or fitness for a particular purpose or use, including the indices, index data and any data included in, related to, or derived therefrom. Neither ICE Data, its affiliates nor their respective third party suppliers shall be subject to any damages or liability with respect to the adequacy, accuracy, timeliness or completeness of the indices or the index data or any component thereof, and the indices and index data and all components thereof are provided on an “as is” basis and your use is at your own risk. Inclusion of a security within an index is not a recommendation by ICE Data to buy, sell, or hold such security, nor is it considered to be investment advice. ICE Data, its affiliates and their respective third party suppliers do not sponsor, endorse, or recommend MacKay Shields LLC, or any of its products or services.

INDEX DEFINITIONS
ICE BofA All U.S. Convertibles Index

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.

Russell 2000 Index
The Russell 2000 Index prominent stock market index that tracks the performance of 2,000 small-cap publicly traded U.S. companies.

S&P500 Index
The S&P 500 Index is a stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States. It is widely considered the best single gauge of large-cap U.S. equities and represents about 80% of the total U.S. stock market's value.

Download the full article

Subscribe to get MacKay Shields insights delivered to your inbox.

Subscribe Now

Related Thought Leadership