HYBRID VIGOR: VOL 3 ISSUE 42 "Hope"

Readers of this space already know that I am deeply concerned about the implications of last week’s election. As an American who’s spent most of his life in our country’s two most progressive urban regions, I worry for the ground we will lose and for the people most at risk. As a feminist and father of two daughters, I worry about the misogynistic hints in the campaign and the vote.  I pray that our better angels will dictate our actions.

But as an outspoken advocate of the convertible-bond market, I am heartened. Indeed, I believe the President-elect may be its savior.

Consider the following:

The 10-year Treasury yield has backed up about 40 basis points since the election thanks to the President-elect’s stated infrastructure-spending plans (plans I have been endorsing for years), getting prospective capital raisers to give a new look to the interest-cost savings from convertibles

A resurgence in infrastructure spending could bring that sector to the capital markets, likely involving a significant allocation to convertibles especially by small and mid-size companies

Given the importance of the specialty pharmaceutical and biotech sectors to convertible issuance, the dramatic change in regulatory prospects (or lack thereof) has already restored health to those markets, making healthy issuance far more likely

Volatility, it would seem, will be higher, given the unpredictability of the new administration—but probably the healthier kind of volatility, not that associated with broad credit implosions

Last week’s performance, with Treasury bonds, traditional corporate and high-yield bonds all down, convertibles up, suggesting a major turn.  While there has been no shortage of demand for convertibles in recent years, the asset class may become more attractive for larger shares of capital in this new world, as allocators redouble their efforts to minimize duration risk within fixed income.

It makes sense to me. If nothing else, it reflects the audacity of my hope.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).