According to Securities Times APP, Morgan Stanley Fund stated that convertible bonds were once considered a derivative financial instrument with no limit on the upside and a safety net on the downside, showing strong offensive capabilities during bull markets and defensive capabilities during bear markets. The dual offensive and defensive properties of convertible bonds make them significantly outperform major stock indexes. Even in a bear market for stocks, the decline of low-priced convertible bonds supported by the bond floor is generally relatively controllable. However, the investment return of convertible bonds in 2024 is very disappointing, completely failing to demonstrate resilience. As of September 13, the Zhongzheng convertible bond index fell by 6.69%, the equally weighted convertible bond index fell by 11.33%, and the market share of convertible bonds with a face value below 100 yuan exceeded one-fourth.return on investmentSuperficially, the weak performance of the convertible bond market in 2024 can indeed be attributed to the overall weakness of the stock market and the mid-small cap style. However, the deep-seated reason lies in the persistent concern over convertible bond credit risks, and the liquidity shocks caused by concentrated institutional selling intensify the adjustment of the convertible bond market. The current reassessment of convertible bond credit risks has gradually subverted the traditional pricing model of convertible bonds, leading to continuous adjustments in the decline of low-priced convertible bonds breaking historical patterns. High Yield-to-Maturity (YTM) and Double Low convertible bond strategies have been very successful long-term strategies. However, 2024 has become a turning point for these two strategies, as convertible bond investment strategies based solely on high YTM or Double Low principles have performed extremely poorly. This is mainly because convertible bonds with poor credit ratings and potential delisting risks have relatively low valuations, making them more likely to be included in portfolios constructed solely based on high YTM or Double Low principles, causing significant drag on the portfolios.

After the reassessment of credit risks, will the convertible bond market usher in a recovery rally in the future? Currently, it may be difficult for the convertible bond market to reproduce the rapid recovery rally of 2021. The impact of the credit risk shock on convertible bond market in early 2021 is comparable to the current adjustment, but the rapid pricing recovery in 2021 mainly relied on the strong bull market of mid-small cap stocks that year. In the absence of systemic opportunities in the stock market, the valuation recovery process of low-priced convertible bonds in the future may be similar to ordinary corporate bonds after the 2018 default wave, with credit spreads expected to remain high. Price recovery of bonds will mainly depend on the improvement in visibility of the issuers' cash flows and the reduction of remaining maturities.

Overall, the long-term value of convertible bond assets is gradually becoming evident. During the market adjustment process, some convertible bonds with decent fundamentals have been mistakenly sold off. In addition, with some issuers actively lowering the conversion prices of their convertible bonds, these bonds are expected to be the first to see a return in value. However, the medium to long-term investment opportunities in the convertible bond market still rely on the overall stock market recovery. In terms of convertible bond strategies, the basic analytical framework of High Yield-to-Maturity (YTM) and Double Low strategies still have the potential for adjustments, requiring a stronger focus on the fundamentals of the underlying stocks, avoiding convertible bonds with credit flaws and potential delisting risks, and seizing structural investment opportunities in the convertible bond market.

Overall, the long-term value of convertible bond assets is gradually becoming evident. During the market adjustment process, some convertible bonds with decent fundamentals have been mistakenly sold off. In addition, with some issuers actively lowering the conversion prices of their convertible bonds, these bonds are expected to be the first to see a return in value. However, the medium to long-term investment opportunities in the convertible bond market still rely on the overall stock market recovery. In terms of convertible bond strategies, the basic analytical framework of High Yield-to-Maturity (YTM) and Double Low strategies still have the potential for adjustments, requiring a stronger focus on the fundamentals of the underlying stocks, avoiding convertible bonds with credit flaws and potential delisting risks, and seizing structural investment opportunities in the convertible bond market.