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Why Investors Are Flocking to Convertible Bonds: The Smart Bet on Small-Cap Stocks

by Team Lumida
July 27, 2024
in Markets
Reading Time: 3 mins read
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Key Takeaways

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  1. U.S.-listed companies issued $48.6 billion in convertible bonds this year.
  2. Convertible bonds offer lower borrowing costs compared to junk bonds.
  3. Investors added $367 million to convertible bond-focused funds in 2024.

What Happened?

U.S.-listed companies have issued $48.6 billion in convertible bonds this year, marking the highest issuance since 2021. Smaller companies like Lyft and Snap are leading the charge, capitalizing on low borrowing costs and the potential for stock price appreciation.

For instance, Lyft issued $460 million in convertible bonds due in 2029 with a 0.625% annual coupon, while Snap issued $750 million due in 2030 with a 0.5% coupon. Investors are betting on these bonds converting to stock if share prices hit specific targets.

Why It Matters?

Convertible bonds offer a win-win for both companies and investors. Companies benefit from lower borrowing costs—the average coupon on convertible bonds this year is 2.6%, significantly lower than the 8% yield on junk-rated bonds. This makes convertible bonds an attractive option in a high-interest-rate environment. Investors gain the potential for high returns while protecting their principal.

The excitement over artificial intelligence and anticipated Federal Reserve rate cuts have fueled this trend, lifting the S&P 500 by 14% this year. Michael Miller, CEO of Wellesley Asset Management, noted, “Small-caps have really been outperforming large-caps, pulling convertible bonds right along with them.”

What’s Next?

With the Federal Reserve expected to cut rates in September, the issuance of convertible bonds is likely to grow. This trend signals a broader market rally, benefiting various asset classes, from blue-chip stocks to junk bonds. However, risks remain.

Elevated rates could hurt the profitability of smaller companies, and potential volatility around the upcoming presidential election could impact the market. Bryan Goldstein from Matthews South advises, “Our dialogue has been more to try to get an issuance out in advance of elevated volatility around the election cycle.”

Source: Wall Street Journal
Tags: Stock Markets
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© 2025 Lumida Wealth Management LLC is an SEC registered investment adviser. Privacy Policy. Cookies Policy.
Disclaimer Important Information This site is for informational purposes only. Information presented on this site does not constitute as investment advice.

Lumida Wealth Management LLC (‘Lumida”) is an SEC registered investment adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.

Lumida's website (referred to herein as the "Website") is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of the Website on the Internet should not be construed by any client and/or prospective client Lumida’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet.

Any subsequent, direct communication by Lumida with a prospective client will be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

‍Lead Capture Forms: By submitting your contact information in the forms on this site, you are not obligated to invest in Lumida's product or services.
‍Address: Lumida Wealth Management, 25 W 39th Street Suite 700, New York, NY 10018