BofA cites AI exposure as convertible bonds outperform stocks

Investing.com - Bank of America says equity investors should monitor convertible bonds following the asset class's outperformance of U.S. equities and bonds year-to-date in 2026, according to a research note published by the firm.

Convertible bonds combine features of stocks and bonds, allowing investors to participate in equity price appreciation with limited downside risk. Year-to-date, the securities have outperformed the S&P 500, Nasdaq, and bonds while delivering stronger Sharpe ratios during 2026's volatile market conditions.

The convertible bond market has grown to approximately $600 billion globally, a record high driven by increased issuance for capital expenditure financing. One-third of the market now consists of exposure to AI hyperscalers, neoclouds, and memory companies, Bank of America reports.

Higher stock volatility boosts embedded option values in convertible bonds and supports pricing, the firm notes. The volatility implied by convertible bond options is often longer-dated, cheaper, and more liquid than listed equity option volatility.

Bank of America says the entry point into convertible bonds improved following cheapening in July driven by AI-related market moves. Retail fund flows indicate convertible bonds remain under-owned by investors, according to the firm.

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