Our Outlook: Significant Opportunities for Convertibles

Jon Vacko, CFA, and Joe Wysocki, CFA

Summary Points:

• Equity market gains, tightening credit spreads, and easing monetary policy created a positive backdrop for the convertible market in the third quarter, and Calamos Convertible Fund was positioned to capitalize on these tailwinds.
• Market breadth creates new tailwinds for the convertible market, where small- and mid-cap growth companies are well represented.
• Convertible issuance was exceptionally robust over the quarter, and we expect a favorable issuance environment to continue.

The third quarter marked a pivotal shift in the monetary policy landscape as the Federal Reserve initiated its first rate cut of 2025, lowering the federal funds rate by 25 basis points. While modest in isolation, this move signals the central bank’s transition toward a less restrictive monetary stance, with the potential for additional cuts before year-end. Additionally, US economic fundamentals remain solid, underpinned by pro-growth fiscal policies and continued corporate investment in transformative technologies such as artificial intelligence (AI). Although inflation remains somewhat elevated, powerful disinflationary forces from AI-driven productivity gains provide a constructive counterbalance to tariff-related price pressures.

This environment proved supportive for risk assets, with equity markets delivering solid returns and credit spreads continuing their compression from earlier-year highs. It also provided a tailwind for the convertible market, where issuers tend to be small- and mid-cap focused companies. This cohort stands to benefit as equity market leadership broadens beyond mega-cap technology stocks—a development we believe represents a significant opportunity, supported by both fundamental momentum and the historical benefits of rate-cutting cycles for these types of companies.

Global new issuance trends were exceptionally robust, with the third quarter’s $54.4 billion representing one of the strongest third-quarter volumes in recent memory and bringing year-to-date totals above $125 billion. This strength reflects companies’ strategic use of convertibles as a cost-effective tool for capitalizing on growth opportunities and refinancing other forms of debt. We expect this favorable issuance environment to persist into year-end and beyond.

Calamos Convertible Fund’s positioning remains focused on companies poised to benefit from transformative secular and cyclical trends. The AI-related theme is one of the strongest trends across capital markets, impacting virtually every economic sector. These opportunities also align with “America-first” fiscal policies aimed at rebuilding domestic infrastructure and promoting technology leadership.

Technology represents the fund’s largest allocation alongside meaningful exposure to the industrials sector. We continue to selectively identify attractive beneficiaries of these themes, and we believe our strategy of leveraging convertibles to pursue asymmetric payoff profiles (i.e., more exposure to equity market upside than downside) is particularly appropriate for the current environment.

Looking ahead, we anticipate continued pro-growth fiscal policies combined with a data-dependent but increasingly accommodative monetary policy framework. Markets have advanced strongly from the tariff-induced concerns earlier in the year and may experience periods of volatility into year-end as investors debate the magnitude of recent gains. Nevertheless, we believe risk assets can continue to benefit from strong fundamental momentum across our core investment themes.

The hybrid structure of convertible securities—combining equity-like growth potential with bond-like risk-mitigation characteristics—offers an attractive risk-reward proposition in this environment. We believe active management remains essential, as each convertible security offers unique structural features that can evolve over time, making disciplined security selection and ongoing portfolio management critical to optimizing return profiles.