The artificial intelligence boom is driving a record surge in convertible bond issuance, with companies seeking cheaper financing for AI-related projects. In 2026, $13.6 billion has been raised through equity-linked securities by February 18, a 556% increase from the same period last year. Total issuance in 2025 exceeded $120 billion, marking the busiest year on record for convertible bonds. Firms like Alibaba Group, Lumentum Holdings Inc., and Super Micro Computer Inc. are utilizing these securities to fund their AI initiatives.
Convertible bonds, a hybrid of stocks and bonds, offer steady payouts and the option to convert into stock if the issuer's share price rises significantly, typically by 20% to 30%. This structure allows borrowers, particularly tech companies, to secure favorable interest rates compared to traditional bonds. The market is currently seeing about 30% of global convertible bonds tied to AI, highlighting the sector's significant influence. Despite being a smaller part of the bond market with outstanding issuance just under $500 billion, it's gaining attention due to strong returns and increased issuance from tech companies like CoreWeave, Nebius, Alphabet, and Oracle.
However, this AI-driven frenzy is introducing new risks. While the iShares Convertible Bond ETF has returned 22% and Fidelity Convertible Securities Fund 20% this year (outperforming the S&P 500's 14%), the iShares fund now has over 44% of its holdings in technology, including volatile names like Western Digital and Alibaba Group. The fund's yield is only 1.4%, indicating that gains are primarily from price appreciation rather than interest income, reducing the cushion against potential losses. This shift is making the convertible bond market riskier, as funds like Calamos Convertible Fund, despite benefiting from the price run-up, are trimming exposure to the most volatile AI-related securities. Analysts like Michael Youngworth of BofA Securities suggest convertibles offer a less risky way to bet on AI than direct stock ownership, but they do not provide a less risky alternative to a diversified portfolio.
