As Australian investors search for opportunities beyond traditional shares and fixed income, convertible bonds are stepping into the spotlight. Blending the security of bonds with the upside potential of equities, these hybrid securities are becoming a popular choice in 2025—especially as markets remain volatile and interest rates fluctuate.
What Exactly Are Convertible Bonds?
Convertible bonds are debt securities issued by companies that can be converted into a predetermined number of ordinary shares. They start life as bonds—paying regular interest (coupons) and returning principal at maturity—but include the option for the holder to convert into equity, typically at their discretion and under certain conditions.
- Income plus growth: Investors earn regular interest but can benefit from share price appreciation if the issuing company’s fortunes improve.
- Downside protection: If the company’s shares underperform, the bondholder still receives coupon payments and principal (unless the issuer defaults).
- Corporate flexibility: For companies, convertibles can mean lower interest costs and a way to raise capital without immediate share dilution.
In Australia, convertible bonds are less common than in the US or Europe, but 2025 is seeing increased activity, especially among tech, green energy, and infrastructure firms seeking flexible funding.
Why Convertible Bonds Are Attracting Attention in 2025
This year’s financial landscape is defined by uncertainty: the RBA’s path for interest rates remains data-dependent, equity valuations are mixed, and investors are hungry for yield without taking on excessive risk. Convertible bonds offer a compelling middle ground:
- Rising interest in hybrids: In 2025, ASX-listed convertible and exchangeable notes have seen inflows as investors diversify beyond traditional fixed-income products.
- Green and tech issuers: Clean energy firms like Genex Power and tech players such as Zip Co have issued convertibles to tap capital for expansion, appealing to ESG-focused and growth investors alike.
- Tax considerations: For Australian investors, interest from convertibles may be subject to different tax treatment than franked dividends, which could affect after-tax returns depending on your situation.
Recent deals—such as the $300 million convertible note by a leading renewable energy developer—highlight the increasing role these instruments play in corporate funding strategies.
Risks and Rewards: What Investors Should Watch For
While convertible bonds offer a unique risk-return profile, they’re not a one-size-fits-all solution. Here’s what to weigh before investing:
- Conversion terms: The value of the conversion option depends on the underlying share price and conversion ratio. If the company underperforms, conversion may not be attractive.
- Credit risk: Convertible bonds rank below senior debt but above equity, so issuer creditworthiness remains crucial.
- Market volatility: In a downturn, convertibles can behave more like traditional bonds, but sharp equity rallies may see them lag pure shares due to their fixed-income features.
- Liquidity: The Australian market for convertibles is smaller and can be less liquid than for shares or government bonds, making it harder to buy or sell at the desired price.
To manage these risks, some investors opt for convertible bond funds or ETFs, which offer instant diversification across issuers, industries, and conversion terms. As of 2025, several ASX-listed managed funds now include a convertible allocation, reflecting increased demand for hybrid strategies.
Is a Convertible Bond Right for Your Portfolio?
Convertible bonds aren’t just for sophisticated investors or institutions. They can suit anyone seeking balance: a way to earn income with a dash of growth potential. As more Australian companies tap this market, and as regulatory frameworks evolve (with 2025’s ASIC updates on hybrid disclosure requirements), retail investors have more access—and more information—than ever.
- Assess your risk tolerance: Are you comfortable with equity exposure, or do you prioritise capital protection?
- Consider your income needs: Coupon rates on convertibles may be lower than on traditional bonds, reflecting the value of the conversion feature.
- Understand the issuer: Scrutinise the company’s credit profile and the specific terms of each bond.
Convertible bonds are not a silver bullet, but in 2025’s complex market environment, they offer a creative way to capture both stability and upside.
