The struggling equity-linked market in Europe will likely be boosted by higher volatility levels not seen since the COVID-19 pandemic, a much-needed boost after years of low issuance.

The expected bounce-back comes after European convertible bond (CB) volumes have lingered in the doldrums for several years, with some market participants even questioning the future of the asset class.

However, global volatility has spiked recently in reaction to tariffs introduced by US President Donald Trump, with the EURO STOXX 50 Volatility Index (VSTOXX) shooting up to 42.18 in 1Q25, up quarter-on-quarter from 17 in 4Q24.

“CBs offer equity upside via the embedded option, whose value rises in volatile markets, increasing the theoretical worth of the convertible feature and making terms more attractive to investors even amid weak equity sentiment,” an ECM banker said. 

In 2024, the VSTOXX remained below 18.29 despite French President Emmanuel Macron’s decision to call a snap parliamentary election in June leading to a hung parliament.

But Trump’s aggressive posture on trade has lifted volatility, with The VSTOXX remaining elevated in 2Q25 so far at around 30. This elevated volatility has led to increased optimism about CBs in Europe.

“Last year was a weak vintage, with low volatility and easy access to straight debt keeping issuers away,” an equity-linked banker said. “Redcare Pharmacy, however, has reopened the European market, pricing at the top end and now trading high, which is a strong signal.”

Redcare issued a EUR 300m convertible bond on 8 April and there are expectations that CB activity will pick up the longer the US’s trade war against China and other countries continues.  The bond has done well since pricing, and, as of 16 April, was trading at around 108.8 according to Dealogic data.

Additionally, a wave of pandemic-era redemptions due in 2025–26 — like Redcare — are likely to see issuers refinance CBs over the coming months, boosting volumes.

The improved environment for European CBs comes as Covid-levels of volatility returned to the global economy. During the pandemic that officially began in March 2020, CB volumes remained above USD 8bn in from 2Q20 to 2Q21.

With trade war volatility expected to remain in the near-term, market participants are optimistic that CB volumes in Europe will pick up again.

“If Trump-induced volatility persists, H2 could become a catch-up period with new types of issuers—especially refinancing-driven and high-yield names returning to the CB market—alongside a reopening of exchangeables, where interest is already picking up,” the equity-linked banker concludes.