Market Commentary
The first half of 2026 proved to be particularly turbulent, although investors largely managed to look through the noise and there were numerous opportunities to exploit price gaps, lock-in profits and reposition for the next leg of the rally. The market was narrow and volatile, dominated by unfavourable geopolitics, and fear and excitement in equal measure over the trajectory of the AI trade. The only thing that appears certain is that nothing is certain; which parts of the AI value chain will perform, will the truce in Hormuz weather the storm, where are interest rates likely to be at the end of the year, will the recent rotation gain traction or fade in the face of the inexorable rise of the AI-machine. Uncertainty breeds volatility which benefits convertible bonds. Issuance remains on track for a record year, performance has been compelling against other asset classes, and we have seen a broadening of performance towards Europe and Japan from the US and Asia, underlining the truly global reach of the product.
June started with a US jobs report that weighed on equities and propelled yields higher. The blowout number essentially put to bed any hopes of rate cuts in 2026 as Kevin Warsh took over as Chairman of the Federal Reserve, setting a rather different tone to that of his predecessor. There will be less forward guidance with markets expected to digest events without viewing them in the context of how the Federal Reserve is likely to react as a consequence. The June committee was a somewhat hawkish get together and US borrowing costs may also rise as traders start to demand a higher rate premium to offset increased rate setting unpredictability.
The US and Iran signed a potential deal to end the conflict which has been raging since late February. The outcome looks more like success for Teheran than for Washington, but it freed up traffic in the Strait of Hormuz and paved the way for Iran to start oil exports, rolling back long-term sanctions and bringing much needed dollars.
Elsewhere, SpaceX successfully launched the largest ever IPO, ASML became Europe’s most valuable company of all time, gold plunged to 6-month lows, the Bank of Japan raised rates to a 31-year high, UK Prime Minister Keir Starmer resigned, and Bitcoin hit a 20-month low.
Convertible issuance has been buoyant but hyperscaler capex is spurring the US technology behemoths to print huge tickets in the debt market including a jumbo mandatory deal for Google owner Alphabet. The AI space remains firmly Darwinian (only the strongest will survive) and there was notable weakness after a disappointing report from Broadcom and more general profit taking after a substantial winning streak. Micron soon came to the rescue by reporting a 15-fold surge in quarterly profits but the sell-off returned. The AI road will not be without the odd pothole but it remains to be seen if a deeper, full-blown rotation is really on the cards.
New Issuance
In June, global convertible issuance totalled USD45bn, shattering the previous monthly record. The US led the way with USD35.6bn, followed by Europe with USD5.3bn. Asia added USD3.8bn but there were no new deals in Japan. This brings the year-to-date total to almost USD140bn. June’s volumes were again heavily driven by the AI infrastructure theme as Alphabet, Super Micro and Ciena all sold new bonds. Alphabet raised USD19.3bn via mandatory preferreds as part of its wider USD85bn capital raise. European primary has lagged the US and Asia for some time, but this month there were a number of new deals; Schneider Electric, K+S AG, RAG Stiftung (Evonik), ST Microelectronics, AT+S AG, Orpar (Remy Cointreau), Vonovia and Veolia added several benchmark-sized deals to the universe.
Performance
Convertible performance suffered from the weakness in the underlying equities; however, convexity played its part and the downside was limited. The Fund lost 1.1% in June against a benchmark return of -1.6% and the portfolio’s underlying equity basket -2.5%. Over the same period, the MSCI World index lost 0.2%, high yield and investment grade credit both rose 0.2%, the VIX volatility gauge spiked above 20 before retreating into month-end. The ITRAXX Xover credit index continues to tighten; from 360bps at the end of March to 245bps at the end of June. Fortunes diverged between regions; Europe rose 0.4%, Japan gained 0.1% but the US fell 0.8% and Asia lost 0.9%. In line with the broader rotation, the defensive sectors did best (Pharmaceuticals +0.5%, Utilities +0.2%, Real Estate +0.1%) but other sectors were weak including Technology -0.6%, Consumer Cyclicals, Financials and Basic Materials which each lost 0.3% and Communications which fell 0.2%.
The US Pharmaceuticals added 0.4% with gains for Halozyme, Ligand, NeoGenomics and Cytokinetics. Compass Inc generated 6bps in US Real Estate. In Utilities, gains were split between the US names (CMS, Centerpoint, First Energy, Alliant, Pinnacle West) and Europe (a 9bps gain for Iberdrola). The Technology sector was the weakest link but again, fortunes diverged between the US and Asian names (losses for Akamai, On Semiconductor, Super Micro, Applied Digital Strategy, Wiwynn and Lenovo not offset by gains for Palo Alto, Ultra Clean, Nebius, Lumentum and Quanta Computer) and the European / Japanese positions (ASML, STM, AT+S, Taiyo Yuden and Advantest) which all rose. The Asian names accounted for much of the weakness in Consumer Cyclicals (Alibaba, Trip.com. JD.com) whilst in Financials, US crypto platform Coinbase and insurer Ping An in Asia were the main detractors. Basic Materials were weak across the board; Albemarle in the US, Zijin Mining in Asia, and Aurubis in Europe all detracted.
In relative terms, Europe, Japan and the US all contributed; only Asia detracted. The strongest performance came from Technology +77bps; the overweights in Palo Alto Nebius and Cleanspark in the US as well as the underweight in Strategy; the overweights in ASML, STM and AT+S in Europe; the overweight in Taiyo Yuden in Japan. Energy also did well (overweight Solaris and underweight Energy Fuels and Yankuang Energy) as did Pharmaceuticals (overweight NeoGenomics and Ligand in the US and Wuxi Apptech in Asia).
Outlook
Convertible bonds have generated attractive risk adjusted returns so far in 2026. Global convertibles have done better than equities and fixed income. The new issue market continues to add new names to the universe and convexity played its part during periods of equity market weakness. We remain constructive on the potential of the asset class to continue to generate strong performance in H2.
condividi.