Lost among record levels ofissuance of both investment grade and high yield bonds, activity isstarting to percolate in a quieter corner of the capital markets:the convertible bond market. Convertible bonds are hybrid financingvehicles. They're issued as a bond, but they include an option forthe bondholder to convert them into a specified number of shares ofcommon stock in the issuing company. This embedded option, sold bythe issuer to the investor, enables the issuer to lock in a lowercoupon than it could for equivalent straight debt, and it enablesinvestors to receive current income in the form of cash couponswhile potentially participating in the upside of the underlyingshares.

Over the past fewyears, historically low interest rates have made traditional bondsvery attractive to issuers. Many have opted to lock in low couponsin the straight debt markets, rather than issue convertible bondsthat would potentially result in future dilution of their commonstock. Corporate America's focus on more traditional bonds has limited the supply of newconvertible offerings. Recently, however, favorable marketconditions have led to a surge in new convertible offerings, andthe trend may be just getting started.

This shift has beendriven by several factors. Because convertibles include bothbond-like and equity-like features, the combination of low interestrates and equity prices at all-time highs makes them veryattractive for issuers willing to look beyond more-familiarfinancing options. Recent convertible issuers have locked in lowcoupons and attractive conversion prices—but these favorable marketconditions are hardly breaking news.

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