CITIC Securities: Convertible bonds return to neutral, focus on marginal changes in the war situation to identify expectation differences

Text | Zeng Yu Zhou Bowen

Recently, attacks on oil and gas infrastructure in relevant countries have accelerated market pricing toward long-term and expanding conflicts, as well as potential damage to global demand. The war’s progression is unpredictable, but for convertible bond investors, it is advisable to seek opportunities based on expected differences. On one hand, current convertible bond valuations have returned to neutral; although we cannot yet confirm that they are significantly undervalued, there is room for operation. On the other hand, waiting for the emergence of expected differences—when market pricing logic further shifts toward long-term and demand-damage scenarios—could offer substantial gains by positioning for short-term war resolution and marginal easing of tensions. In the short term, it is recommended to monitor the trends of sectors with similar logic, such as non-ferrous metals, to assist judgment. Overall, the Iran situation has limited impact on the domestic environment, and convertible bonds tend to revert to their mean prices and exhibit long-term upward trends. Therefore, finding the right entry points and holding firmly is crucial.

From March to date (as of March 19 close), the CSI Convertible Bond Index has fallen 5.65%, with a 1.64% decline on March 19.

1. The convertible bond market has experienced significant adjustments, mainly due to prior overvaluation, with catalysts being the potential expansion and prolongation of the Iran conflict.

From March to date (as of March 19 close), the CSI Convertible Bond Index has fallen 5.65%, with a 1.64% decline on March 19. We believe the main reason for the recent adjustment is that valuations were too high, and in a volatile equity environment, this led to larger declines in convertibles. Early on March 19, attacks on oil and gas infrastructure in Qatar, Saudi Arabia, and other regions raised concerns about the long-term and expanding nature of the Iran situation, which may accelerate the market’s pricing of global demand impacts due to war.

2. The convertible bond market has returned to a neutral state and should no longer be viewed as overvalued.

As of March 19 close, the median convertible bond price has fallen to around 135 yuan, down about 9 yuan from the mid-February level of over 144 yuan. We believe the asset has now returned to a neutral state, corresponding to an estimated underlying return of about 2%. While we cannot yet confirm that convertibles are significantly undervalued, there is now operational room.

3. In the short term, focus on marginal changes in the conflict, seeking expected differences.

Since late last month, when the Iran situation changed, the market initially viewed the conflict as short-term, with trading mainly driven by pulse-like rises in oil prices. The market has underpriced the risk of long-term conflict, especially the long-term blockade of the Strait of Hormuz, which could lead to a decline in global demand. Currently, there is little expected difference in short-term war resolution, but significant expected differences exist for long-term conflict scenarios. However, for investors solely taking long positions, trading based on these long-term expectations may be challenging.

Since March, the market has gradually priced in long-term conflict, with increasing concerns about a prolonged blockade of the Strait of Hormuz and its impact on global demand, especially as Iran has shown greater resilience in the conflict. Recently, attacks on oil and gas infrastructure in relevant countries have accelerated market pricing toward long-term and expanding conflicts, as well as potential damage to global demand.

The progression of the war is unpredictable, but for convertible bond investors, it is advisable to seek opportunities based on expected differences. On one hand, current valuations have returned to neutral; although not yet significantly undervalued, there is room for operation. On the other hand, waiting for the emergence of expected differences—when market logic shifts further toward long-term and demand-damage scenarios—could offer substantial gains by positioning for short-term war resolution and marginal easing of tensions. It is recommended to monitor sectors with similar logic, such as non-ferrous metals, which previously priced in supply constraints and demand growth. Recently, as market expectations shift toward demand concerns, these sectors have experienced significant adjustments. If the market’s pricing of demand risks stabilizes, it may be appropriate to allocate to convertible bonds. Overall, the Iran situation has limited impact on the domestic environment, and convertible bonds tend to revert to their mean prices and exhibit long-term upward trends. Therefore, identifying suitable entry points and holding steadily is essential, as the main positive and negative factors are reflected in their cross-sectional prices.

Equity market volatility risk. Convertible bond prices are highly correlated with the underlying stocks; significant equity adjustments could lead to substantial losses in convertible investments.

Liquidity risk. On one hand, daily trading volume in the convertible bond market has declined significantly compared to 2022, and further liquidity deterioration could negatively impact valuation levels. On the other hand, liquidity and institutional behavior in the convertible market are closely linked to the bond market; major disruptions in the bond market could influence convertible performance through liquidity channels.

Interest rate and credit spread volatility risk. Currently, the average bond floor value of convertibles is high; future fluctuations in interest rates or credit spreads could cause the pure bond value to fluctuate, increasing the risk of large price swings.

Credit and delisting risk. Some individual bonds are approaching maturity; if unable to fulfill obligations, credit risk may arise. If the underlying stock of a convertible is delisted, the convertible may also be delisted, leading to delisting risk without a public market.

Uncertainty in exercise terms. For issuers, the exercise of call or put provisions depends on comprehensive considerations, leading to significant uncertainty. As remaining time decreases, the probability of call or put options being exercised does not necessarily increase.

Policy/regulatory risk. Public offering convertibles, as tools for corporate refinancing, are heavily influenced by regulatory policies affecting valuation and liquidity. The new regulations introduced in late 2022 corrected market imbalances and promoted long-term development. Currently, regulatory policies have remained relatively stable for nearly four years, but any changes could cause short-term market disturbances.

Research Report Title: “Convertible Bonds Return to Neutral, Focus on Marginal Changes in War Situation to Seek Expected Differences”

Release Date: March 19, 2026

Publishing Institution: CITIC Securities Co., Ltd.

Analysts:

Zeng Yu SAC ID: S1440512070011

Zhou Bowen SAC ID: S1440520100001