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

Core Viewpoints

Under the continuous impact of internal and external disturbance factors, the market’s risk appetite keeps falling. The high-volatility pattern in the convertible bond market is expected to persist. It is recommended to allocate to dividend-focused convertible bonds as a core holding and to make a modest tactical allocation to undervalued names to bet on a stage-by-stage rebound.

With ongoing internal and external disruptions, convertibles fall again

Over the past week (2026/03/30~2026/04/03, same hereinafter), the Middle East geopolitical conflict kept disrupting conditions. On top of that, the market entered the earnings verification window, and the decline in risk appetite led to a synchronized adjustment in both convertibles and equities. The convertible bond broad index fell 0.64%, with the decline smaller than that of the mid-cap index (-2.1%) and the small-cap index (-1.2%). The high-price index dropped sharply by 4.3%, and overvalued issues continued to face sustained pressure. On the overseas front, the Middle East geopolitical conflict continued to intensify. Trump’s remarks related to Iran reduced the market’s expectation of a ceasefire. Energy supply constraints may turn into a medium- to long-term disturbance factor. The logic of the stagflation/slow-inflation trade is difficult to break in the short term, and global risk assets were broadly under pressure. In China, the A-share market entered a period of dense disclosure of annual reports and first-quarter reports; market sentiment turned cautious. Investors generally waited for fundamental data to become clearer. Both equity and convertible bond trading volumes noticeably shrank. Based on valuation, convertibles’ prior valuations were already at historical highs. Although there has been a substantial pullback recently, valuations still have not returned to a reasonable range, leaving insufficient margin of safety. It is recommended to maintain a defensive approach: focus on high-dividend, stable-earnings issuers, and avoid high-price, high-valuation issues with high elasticity.

Market pullback; allocation strategy should focus on defense

In the past week, the convertible bond market saw volatile differentiation. It is recommended to maintain a defensive strategy. According to the backtesting results of the Guotai Junxinyu quantitative convertible-bond model from Zhejiang Securities’ fixed-income research, as of 2026/04/03, over the past week the convertible bond market overall exhibited a structural, differentiated pattern of volatility. Differences in internal performance among style factors remained significant. In the momentum style, the “Golden 25 Convertible (金25转债)” in the copper industry performed relatively actively, rising +2.04% for the week. Meanwhile, “Micro-Guide Convertible (微导转债)” and “Liugong Convertible 2 (柳工转2),” which are also in the momentum style, faced clear downside pressure, falling -4.60% and -4.75% respectively. In the volume-price correlation style, there were also sharp fluctuations: the “Hongtu Convertible (宏图转债)” from the software services sector recorded a significant weekly adjustment of -12.08%, while the “Shanhе River Convertible (山河转债)” in the chemical and pharmaceutical sector delivered +1.34% positive returns. Overall, over the past week the convertible bond market showed structural differentiation and a feature of switching between higher- and lower-valuation names. With no one-direction trend in the market, competition among funds across different sectors intensified. Some high-position mechanical-type issues are still releasing valuation pressure, while some issues that suffered deeper declines or have defensive attributes have started to attract investor attention. It is recommended that investors in the current choppy market maintain a neutral-to-defensive allocation strategy, avoid crowded issues with high ZL deviation, moderately pay attention to distressed names with fundamental support and extremely low ZL deviation, and patiently wait for valuation repair opportunities.

Allocate to dividend convertibles to respond to a risk-appetite decline

Looking ahead, under multiple internal and external disturbances, the market’s risk appetite will remain at low levels. With no clear directional guidance in the equity market, dividend-focused convertibles may be the best choice to deal with the current volatile environment. At present, market risk appetite is suppressed by both internal and external factors. From historical experience, during periods when risk appetite declines, the dividend/low-volatility style is typically relatively more advantageous than the growth style. Mapped to convertible-bond strategies, market stabilization signals are not yet obvious. It is recommended to maintain a reasonable position size. On the defensive side, focus on dividend-type convertibles. These issuers rely on the steady attributes of their underlying stocks and have protection from the bond floor of convertibles, giving them strong downside resilience and enabling them to provide solid support for the portfolio. On the other hand, make a modest allocation to undervalued names to seek capital gains from a stage-by-stage rebound in the market.

Risk Warning: 1) Improvement in economic fundamentals is insufficient; 2) Domestic liquidity is tightening; 3) Overseas risk events exceed expectations; 4) Historical experience does not represent the future.

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