Higher rates are unlikely to detour convertibles

Robert L. Salvin

Robert L. Salvin
Portfolio Manager, 06/13/13

A common misperception of the convertibles market is that the returns of these securities are more dependent on interest rates than on other factors. Over time, data have suggested that convertibles are driven more by the strength or weakness of the equity markets, and corporate credit spreads. And because the convertibles are short-duration instruments, there is generally a low correlation between their performance and interest-rate movements. So, while low rates do matter for a variety of asset classes, rates are less relevant to convertibles’ performance.

The 10-year Treasury yield has risen during the second quarter.

During the four most recent rising-rate environments — in 1988, 1994, 1999–2000, and 2004–2006 — higher rates, economic expansion, and equity market strength led to good performance for convertibles. A rising-rate environment should also be positive for the new-issue market, as rising rates can sometimes coincide with rising equity prices.