Zheshang Securities: The high-volatility pattern in the convertible bond market is expected to continue. Recommended to allocate to dividend convertible bonds.

Key Takeaways

Under ongoing external and internal shocks, market risk appetite continues to decline. The high-volatility pattern in the convertible bond market is likely to persist. We recommend allocating to dividend-focused convertible bonds as a core holding, and making a modest foray into undervalued underlyings to bet on a temporary rebound during a lull in valuation.

With disturbances continuing from both within and outside, convertible bonds fall again

Over the past week (2026/03/30~2026/04/03, same below), Middle East geopolitical tensions continued to intensify, and the market entered an earnings verification window. The decline in risk appetite led to a synchronized adjustment in convertible bonds and equity markets. The convertible bond broad index fell 0.64%, with a smaller decline than the mid-cap index (-2.1%) and the small-cap index (-1.2%). The high-price index dropped sharply by 4.3%, and overvalued names remained under sustained pressure. On the overseas front, Middle East geopolitical conflicts continued to escalate; Trump’s remarks on the Iran-related issue reduced market expectations for a ceasefire. Energy supply constraints may turn into a long-term disturbance factor. The logic behind the stagflation trade is unlikely to be broken in the short term, and global risk assets broadly faced pressure. Domestically, the A-share market entered a concentrated period for the release of annual reports and Q1 reports. Market sentiment became more cautious; investors generally waited for further clarity in fundamental data. Trading volumes in equities and convertible bonds shrank noticeably. Based on valuation, convertible bonds’ prior valuations were already at historical highs. Although there has been a sizable pullback recently, they still have not returned to a reasonable range. The lack of a sufficient margin of safety suggests maintaining a defensive approach: focus on high-dividend, stable-earnings underlying names, and avoid high-priced, high-valuation, high-volatility issues.

As the market retreats, the allocation strategy is mainly defense

Over the past week, the convertible bond market saw volatile differentiation, and a defensive strategy is recommended. According to the backtesting results of the Founder Securities (Zhejiang) fixed-income quantitative convertible bond model, as of 2026/04/03, the overall convertible bond market over the past week showed a structural, diversified pattern of volatility. Differences in performance among style factors remained significant. In the momentum style, the “Jin25 Convertible Bond” in the copper industry performed relatively actively, rising +2.04% over the week. Meanwhile, “WeiDao Convertible Bond” and “LiuGong Convertible Bond 2,” also in the momentum style, faced clear downside pressure, with declines of -4.60% and -4.75%, respectively. In the price-quantity correlation style, there were also sharp fluctuations: the “HongTu Convertible Bond” from the software and services sector saw a significant adjustment of -12.08% over the week, while the “ShanHe Convertible Bond” from the chemical and pharmaceutical sector recorded positive returns of +1.34%. Overall, over the past week the convertible bond market exhibited the characteristics of structural differentiation and a valuation “switching” between high and low. The market lacked a one-way trend, and competition for capital across different sectors intensified. Some high-level mechanical-type names continued to release valuation pressure, while certain names with deeper drawdowns or defensive attributes began to attract investor attention. Investors are advised to maintain a neutral-to-defensive allocation strategy in the current choppy market, avoid crowded trades with high ZL deviation, and modestly focus on “value-dislocated” names that have fundamental support and are at extremely low ZL deviation. Wait patiently for valuation repair opportunities.

Allocate to dividend convertible bonds to respond to downward risk appetite

Looking ahead, with multiple disturbances from both within and outside, market risk appetite will remain at a low level. With the equity market lacking clear directional guidance, dividend convertible bonds may be the best choice to deal with the current volatile environment. At present, market risk appetite is constrained by dual factors from both within and outside. Based on historical experience, during phases when risk appetite falls, dividend-low-volatility styles typically outperform growth styles. Mapped to convertible bond strategies, signs of market stabilization are not yet obvious; maintain a reasonable position size. On the defensive side, focus on dividend-type convertible bonds. These issues rely on the stable attributes of their underlying stocks and the convertible bond’s downside protection through the bond floor, giving them strong resistance to declines and enabling them to provide steady support for a portfolio. On the other hand, make a modest allocation to undervalued names to capture capital gains brought by a temporary market rebound.

Risk Warning: 1）Insufficient improvement in economic fundamentals; 2）Tighter domestic liquidity; 3）Overly unexpected overseas risk events; 4）Historical experience does not represent future outcomes.

（Source: Zhejiang Securities）