Investors who think the bulls will be slaughtered this year are seeking safety in hybrid assets instead.
They’re pouring money into convertible bonds, securities that can shield investors when stocks drop or bonds tank. The notes are among the best performing US securities of the year, having jumped 6%, according to Bloomberg Barclays index data, topping the S&P 500 index and junk debt.
With strong investor demand, issuance of the bonds has surged more than 300% to $12.8bn, the highest level since the 2008 financial crisis. 
Companies including Microchip Technology, Tesla and GoPro have sold convertible debt.
Convertible bonds pay interest, like bonds, and can be exchanged for stock after a company’s shares rise above an agreed-upon price. If stocks tank, the coupon payments can prevent the securities’ value from falling too much. And if bond markets plunge, the potential to convert the bonds into equity can keep values relatively strong.
“People are a little more nervous than they have been in the past,” said Eli Pars, co-chief investment officer of Calamos Investments in Naperville, Illinois, which manages $19bn. “Converts are a great way to keep some equity exposure but take risk off the table if you’ve made a lot of money in the bull market.”
Billionaire trader Paul Tudor Jones told investors earlier this month that years of low interest rates have bloated stock valuations to levels not seen since 2000, just before the tech bubble burst, which should be “terrifying” to a central banker. Even Larry Fink, whose BlackRock oversees $5.4tn mostly betting on rising markets, acknowledged last week that stocks could fall between 5 and 10% if corporate earnings disappoint.
Some bond investors are concerned about the Federal Reserve’s plans to hike rates, which could hurt bond prices, said Ed Silverstein, head of convertibles at MacKay Shields, which manages about $95bn.
“People feel that the 30-year bull market in bonds is over. They’re worried,” Silverstein said.
The convertible bond market is relatively small, with about $187bn outstanding in the Bank of America Merrill Lynch index, compared with $1.3tn of US junk debt and $6.2tn of investment-grade notes. Franklin Templeton’s Convertible Securities Fund, which oversees around $2.2bn, is the largest mutual fund according to Bloomberg data. There are also a few convertible-bond ETFs. 
Those funds, the largest of which is the $3.5bn SPDR Bloomberg Barclays Convertible Securities ETF, have seen $155mn of inflows this year.
Investor demand is creating an attractive financing option for some companies with volatile stocks. Large companies like Dish Network Corp have sold the debt this year, but it’s a particularly popular option for small- and mid-cap companies that may lack the credit grades necessary to drum up support in the traditional debt markets.
Take GoPro, a sports-camera maker without credit ratings. It sold $175mn of convertibles this month, up from a planned $150mn. With $419mn of losses last year and shares that have fallen more than 45% since early October, the company might have struggled to sell conventional junk bonds or equity.
The Federal Reserve has hiked rates three times since December 2015, and longer-term bond yields have jumped since July of last year, which have made some investors more fearful about the potential for bond prices to drop further. Rising yields have also increased the incentives for some companies to try to cut their borrowing costs by selling convertible notes, said Calamos’s Pars. “When interest rates were really low, it was hard to get Corps to do anything but straight debt,” Pars said. “As coupon costs go up, that makes the converts conversation a little bit more interesting. It was definitely a good first quarter.”
Even so, some investors are wary of the securities. Kathleen Gaffney, co-director of diversified fixed income at Eaton Vance, which manages $381bn, said she hasn’t been tempted by the asset class recently.
“You’re taking both that equity risk and credit risk at the same time,” said Gaffney, who holds some convertibles in her multisector fund. “History will tell you it’s hard to do both.”
While interest rates are rising, they remain well below where they were in early part of last decade, when annual convertible-debt sales sometimes topped $100bn. Silverstein said the 10-year Treasury would have to reach 3% to 3.5% before borrowing costs rose enough to interest many investment-grade companies.
Even so, the securities may be a good bet now for fearful investors, said David Clott, a money manager at Westwood Funds in Framingham, Massachusetts, which oversees $21bn. If stock markets swing more, the options embedded in convertibles should be worth more, lifting the securities’ value.
“Given the political backdrop and a lot of the expectations in the market, we would expect volatility to pick up,” Clott said. “Volatility makes the assets more attractive.”