Indeed, experts say that convertibles can be better than stocks in uncertain market environments because they often rise almost as much, fall less and are less volatile. That's the case this year, as it was in 1999 and 2000. Through Wednesday this year, convertible mutual funds have dropped 1.55 percent, Morningstar said. What you see now is a much higher-grade issuer basically looking for cheap funding. It had been paying 4 percent a year on short-term debt.
Companies are also looking to save on taxes, which convertibles' complex structures allow.
And it's just these structures that make convertibles popular among hedge funds, which are now responsible for much of the buying and trading. Compared to regular corporate bonds, which throw off interest and give investors their principal back when they mature, very. Many convertibles pay no interest. Some are convertible when the underlying stock reaches a certain target price. Others are convertible only when the stock trades above that price.