Craig McCracken, co-head of equity capital markets at Wells Fargo, said more investment-grade companies were showing interest, promising to make 2023 "a breakout year relative to 2022" for convertible bond issuance.The entry of some investment-grade companies in the convertible bond market shows how the U.S. Federal Reserve’s rapid interest rate hikes to stamp out inflation have created anomalies in the marketplace.
"Convertibles are the cheapest available financing for both high-yield and high-grade issuers right now," said Josh Schaeffer, managing director at accounting firm Equity Methods.Convertible bonds are hybrid securities. Like a regular bond, they pay a coupon and their yields change with interest rates. But their value also depends on the company's stock price, as they can convert to shares. The hybrid nature can limit the risk but also add to it.
Investors were betting on an appreciation in the shares of the company, according to Howard Needle, portfolio manager at Wellesley Asset Management, which bought the bond.Because defensive stocks such as utilities like PPl could benefit if interest rates keep rising, potential returns for investors in convertible bonds could be boosted.
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