A convertible bond is a hybrid product. It combines a traditional bond with a call option on the company's stock. As with traditional debt, the investor lends money to a company. However, they also receive the right to transform this debt into shares if the stock price rises sufficiently. In exchange for this option, they generally accept a lower coupon than on an ordinary bond.

Consider a simple example. A company whose stock is trading at $100 issues a $1,000 convertible bond with a very low coupon, for instance 1%. The contract stipulates that the investor can convert the bond into shares if the stock price exceeds $150. If the price stagnates or falls, they keep the bond and remain a creditor. If the stock rises sharply, they convert and become a shareholder, benefiting from the capital gain.

For a company, the advantage lies in securing lower-cost financing without immediately signaling a capital increase. Financially, however, it is still selling a potential portion of its future equity. In a case cited by the Financial Times, CoreWeave raised convertible bonds with a 1.75% coupon, whereas it had issued traditional debt at 9.75% at nearly the same time.

For existing shareholders, the primary risk is dilution. If the stock price rises sharply, convertible holders will find it in their interest to convert their securities into shares. The number of shares will then increase, which mechanically reduces the stake of existing shareholders.

For the investor, the product offers an attractive compromise. The fixed-income component provides partial downside protection, while the conversion option allows for participation in the stock's upside. It is therefore less risky than a direct equity investment, although  potentially much more dynamic than a traditional bond.

This market could see a record year in 2026. According to Barclays Research, US companies have already issued $57bn in convertible bonds this year. Last year's record stood at $120bn.

The instrument is particularly well-suited to technology companies. AI-related stocks often share the same characteristics: high valuations, strong volatility, and massive capital requirements. Many hold considerable promise but do not yet generate enough cash flow to finance their expansion independently.

Reuters reported in May 2026 that US convertible bond issuance had reached approximately $34bn over the first four months of the year, more than double the previous year, with half linked to AI financing. The proliferation of convertibles may reflect a period of euphoria. When unprofitable companies can raise large sums at low or zero coupons, it means that the market is placing an enormous premium on growth assumptions.

Convertibles are thus part of a broader movement: a global race to finance AI infrastructure. Large tech companies are increasing debt raises, including outside the US.

Convertible bonds thrive in this middle ground. They allow companies to raise capital without paying the high price of traditional debt, while deferring dilution. They offer investors relative protection if the narrative disappoints and upside exposure if the enthusiasm surrounding AI continues.