High-tech stocks are crashing. The threat of inflation hangs over corporate bonds. 1 Unlucky group Investors are feeling the effects of bad luck: Since the start of this year, companies like Twitter and Peloton have Posted Billions of dollars in convertible bonds. They appear to have raised money at the top of the bond and stock markets. Holders of convertible bonds should expect at least one of these markets to recover.
Convertible bonds combine standard debt with the ability to buy shares of the company at a higher price in the future. Demand was so high earlier this year that some companies didn’t have to offer coupons. In February, Peloton issued a $ 1 billion convertible bond. Usually, these zero coupon bonds, which are bonds with a maturity of 5 years, are traded at a reduced price which allows the holder to earn a positive yield to maturity. However, investors have decided that stock options embedded in convertible bonds are so valuable that they should trade at a significant premium or above par.
The bond conversion price is set at $ 239, a premium of 65% of the company’s transaction price at the time. Today, the group’s stock of fitness equipment is changing ownership for just $ 110. Convertibles are trading at $ 95, despite a backlash in recent weeks. At this price, the bond share means a positive return of just under 1%.
Convertible bonds are typically bought by hedge funds that use complex hedging strategies to guarantee returns regardless of how the underlying stock is traded. The convertible bond market has been hot not only because of low yields and high stock prices, but also because of volatility. Volatility increases the value of call options if everything else is the same. But that alone may not be enough to offset long-term concerns about inflation and interest rates. While convertible bonds with a yield of 75 basis points are important as a hedge, a sharp rise in growth stocks could eventually meet this calculation.
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Convertible bonds: the worst of both worlds Source link Convertible bonds: the worst of both worlds