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US convertible bond market comes of age

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After a year-long frenzy, the primary market for US convertible bonds has cooled, following a rotation out of technology stocks and jitters over rising yields on government bonds. An injection of realism is no bad thing, however, and should be welcomed in a market that has almost doubled in size within the space of a year.

The pandemic transformed US convertibles into one of the most vibrant and dynamic areas of the capital markets. It was one of the few financing sources that stayed on tap throughout the onset of the crisis and provided a vital funding lifeline not only to high growth tech companies, but also to hard-hit issuers from traditional sectors such as retail, energy and aviation.

As a result, there has been a flood of issuance, with around than $55.2bn raised so far this year, and $117.7bn last year, Dealogic data shows. The size of the investable universe of US convertible bonds has ballooned to around $429bn as of the end of May, up from $251bn at the end of 2019, according to Refinitiv, which runs the main global benchmark indices for the asset class. The US market's previous peak market capitalisation of around $370bn came in the spring of 2008.

Few capital markets undergo such a transformation in such a short period of time. It is no surprise that recent weeks have seen a slowdown of issuance, and more favourable terms for investors. This is a welcome change and is unlikely to put off any companies who need the financing as the US economy recovers.

With stocks still not far off all-time highs, convertibles will remain a key source of financing for New York-listed companies. Its recent growth spurt means it now has the maturity and size to offer an attractive capital raising alternative.

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