CITIC Securities | April Convertible Bond Market Outlook and Portfolio Recommendations

Text | Zeng Yu Zhou Bowen

Overall, the Iran situation has limited impact on the domestic environment, and it is also believed that the adverse effect of the war conflicts in April on the convertible bond market is likely to diminish marginally. Convertible bond assets have bid farewell to the high valuation state seen in February and March, and the allocation value has begun to emerge. It is recommended to maintain a barbell approach—on one hand, focus on stable individual securities in finance and utilities; on the other, pay attention to growth industries such as non-ferrous metals and AI that experienced significant adjustments earlier. Meanwhile, the valuation of new-issue convertible bonds has also fallen sharply, and recent issuance pace has been good. It is advised to continue monitoring investment opportunities during the initial listing period of new bonds.

Review of the March convertible bond market: significant adjustment in the index, valuation decline. The CSI Convertible Bond Index rose and fell by -7.41% in March. Due to the Iran situation, equity adjustments were substantial, with convertible bonds following the decline of equities and valuations compressing, resulting in the convertible bond index falling roughly in line with equities. In March, the stock market showed defensive characteristics, with large-cap value style outperforming, while mid-cap and small-cap growth stocks declined more sharply. In terms of convertible bonds, high-priced, small-cap, and low-rated bonds experienced the largest adjustments; sector-wise, utilities and financial bonds performed relatively better, while consumer discretionary, industrial, and information technology bonds saw larger declines.

Outlook for the April convertible bond market: initial valuation advantages are emerging, and the market is expected to fluctuate and bottom out, with a gradual increase in positions. After the high valuations in February and March, the current valuation of the convertible bond market has fallen significantly. We estimate that the current underlying return rate of convertible bond assets is about 3%, and the allocation value has begun to appear. We believe the market has priced in the long-term Iran situation sufficiently, and subsequent negative news related to the war may gradually weaken, while positive news could elicit more active responses. At this point, positioning for short-term war and marginal easing could yield considerable gains. Additionally, we believe the most severe phase of global liquidity shocks caused by the war has likely ended, and future asset pricing will depend more on intrinsic characteristics, with the impact of liquidity shocks gradually diminishing. It is recommended to maintain a barbell approach—on one side, focus on stable individual securities in finance and utilities; on the other, on growth sectors like non-ferrous metals and AI that experienced earlier adjustments. Furthermore, the valuation of new-issue convertible bonds has also declined sharply, and recent issuance pace has been good, so it is advisable to keep an eye on investment opportunities during the initial listing phase of new bonds.

1. Review of the March convertible bond market: significant index adjustment and valuation decline

The March convertible bond market saw a large adjustment: the CSI Convertible Bond Index fluctuated by -7.41%, the Shanghai Composite Index by -6.51%, and the Wind Convertible Bond Equity-Weighted Index by -6.33%. Influenced by the Iran situation, equity adjustments were large, with convertible bonds following equities downward and valuations compressing, leading to the index decline roughly matching that of equities.

In terms of equity style, based on the Guozhen Index, March reflected defensive characteristics, with large-cap value outperforming, with a decline of -1.57%. Mid-cap and small-cap growth stocks declined more than 10%. Regarding convertible bonds, by price level, high-priced bonds fell the most (-14.72%), with a significant compression of premium rates, while low-priced bonds declined less (-3.29%). By size, small-cap bonds also saw larger declines, with a -8.69% change in March. By rating, AAA-rated bonds showed defensive traits, with a decline of only -3.8%, better than other ratings, while AA- and below rated bonds declined by -8.82%. Sector-wise, utilities and financial bonds performed relatively better, while consumer discretionary, industrial, and information technology bonds experienced larger adjustments.

Valuation-wise, convertible bond valuations retreated from high levels. The average implied volatility of convertible bonds decreased from 51.3% at the end of last month to 47.6% at the end of March, and the premium-to-convertible ratio also compressed significantly. Observing by price level, the premium rate of individual stocks with high liquidity has fallen most noticeably; the convertibility premium of bonds at a par value of 140 yuan has dropped to the 65th percentile of 2022 levels, influenced both by market adjustments and the increased number of bonds with early redemption.

The valuation of new-issue convertible bonds has been more markedly adjusted. Previously, valuations were at high levels historically, with new-issue bonds’ implied volatility about 30 percentage points higher than the overall convertible bond implied volatility in mid-February, but now this premium has fallen to 14 percentage points. Currently, the valuation premium of new-issue bonds has significantly reverted.

2. Outlook for the April convertible bond market: initial valuation advantages are emerging, and the market is expected to fluctuate and bottom out, with a gradual increase in positions

After the high valuations in February and March, the current valuation of the convertible bond market has fallen sharply. As of March 31, the median price of all convertible bonds was 132.6 yuan. We estimate that the current underlying return rate of convertible bond assets is about 3%, and the allocation value has begun to emerge.

During the sharp adjustment in March, valuation compression was most evident in stocks with high liquidity, driven by both equity market declines and the large issuance of bonds with high redemption premiums. In the short term, the Iran situation remains a focus, but we believe its adverse impact on the convertible bond market is likely to diminish gradually; conversely, positive developments could provide a boost.

Since late February, the Iran situation has been priced into global assets, with markets in March accelerating the long-term war and high inflation expectations, potentially damaging global demand. Alongside short-term liquidity shocks, global equities, gold, and non-ferrous metals experienced adjustments. Early in the month, markets underestimated the long-term nature of the war, especially the risk of long-term blockade of the Strait of Hormuz—potentially leading to a decline in global demand. During this phase, the market did not have significant expectations for war short-termization; instead, the long-term war scenario was more anticipated, but for long-only investors, this was difficult to profit from. Since March, markets have accelerated pricing in long-term and expanded war scenarios, as well as concerns over global demand decline due to the Strait blockade, especially as Iran has shown greater resilience. We believe the market has now priced in the long-term war scenario sufficiently, and subsequent negative war news may gradually weaken, while positive news could elicit more active responses. Positioning for war short-termization and marginal easing could thus offer substantial gains.

Meanwhile, liquidity is also improving marginally. In March, the outbreak of war caused a significant decline in global liquidity, with gold and crude oil showing a clear negative correlation—tensions increased, crude oil prices surged, and gold prices fell, and vice versa. Since last Friday, the negative correlation between gold and oil has weakened, with both rising simultaneously. We interpret this as indicating that the most severe phase of liquidity shocks caused by the war has likely ended, and future asset pricing will depend more on intrinsic characteristics, with the impact of liquidity shocks gradually diminishing.

Currently, the price center of convertible bonds is similar to that in November-December last year, but we believe the institutional behavior may differ. At that time, institutions were more prone to collective upward movement; now, about 46% of the convertible bond balance is held by public funds, which have weaker liability stability than enterprise annuities and insurance institutions. According to data from the Shanghai Stock Exchange, in March, large-scale redemptions caused total scale to decline, with investors’ holdings following the overall scale downward. However, the proportion of holdings has shifted further toward public funds. Based on the current investor structure, we suggest that in April, investors should continuously assess the stability of public fund + products’ liabilities based on market performance and gradually increase positions.

Overall, the Iran situation has limited impact on the domestic environment, and the adverse effect of war conflicts in April on the convertible bond market is also expected to diminish marginally. Convertible bond assets have exited the high valuation phase seen in February and March, and the allocation value has begun to emerge. It is recommended to maintain a barbell approach—focusing on stable individual securities in finance and utilities, and on growth sectors like non-ferrous metals and AI that experienced significant adjustments earlier. Additionally, the valuation of new-issue bonds has declined sharply, and recent issuance pace has been good, so it is advisable to keep monitoring initial listing opportunities.

Risks in the equity market: Convertible bond prices are highly correlated with underlying stocks; significant equity adjustments could lead to substantial losses in convertible bond investments.

Liquidity risk: On one hand, the daily trading volume of convertible bonds has declined significantly compared to 2022, and further liquidity deterioration could negatively impact valuation levels; on the other hand, liquidity and institutional behavior in the convertible bond market are closely linked to the bond market, and major disruptions there could influence convertible bonds through liquidity channels.

Interest rate and credit spread volatility risk: The average bond floor in the convertible bond market has reached relatively high levels. If future interest rates or credit spreads fluctuate significantly, the pure bond value of convertibles could also fluctuate, risking large price swings.

Credit and delisting risk: Some bonds are approaching maturity, and if unable to repay debts, credit risk could arise; if the underlying stock of a convertible bond is delisted, the bond will also be delisted, potentially leading to delisting risk without a public market.

Uncertainty in exercise of terms: For issuers, the exercise of downsize or mandatory redemption clauses depends on comprehensive considerations, so there is considerable uncertainty. As the remaining time of the bonds decreases, the probability of redemption or modification does not necessarily increase.

Policy/regulatory risk: Public fund convertible bonds, as a refinancing tool for listed companies, are heavily influenced by regulatory policies affecting valuation and liquidity. The new regulations introduced in late 2022 corrected some market irregularities and promoted long-term development. Currently, regulatory policies for convertible bonds have remained stable for nearly three years, but any changes could cause short-term market disturbances.

Research report title: “Convertible Bonds: Initial Valuation Advantages, Market Expected to Fluctuate and Bottom Out, Gradual Positioning Recommended—April Convertible Bond Market Outlook and Portfolio Recommendations”

Release date: April 1, 2026

Published by: CITIC Securities Co., Ltd.

Analysts:

Zeng Yu SAC ID: S1440512070011

Zhou Bowen SAC ID: S1440520100001