What's going on?

Top US companies are turning to an unexpected source to borrow, diving into the convertible bond market � typically the stomping ground for junk-rated firms.

What does this mean?

Think of a convertible bond as the asset you�d get if a stock and a bond had a baby. Like any bond, a convertible pays interest to its holder, but unlike the old-school versions, it can be swapped for stock at a later date. Now, because of that sweetener, these convertible bonds pay less in interest ��and that allows firms to borrow more cheaply without immediately watering down the value of their stock, as issuing brand-new shares would.�

If this sounds familiar, that�s because these kinds of bonds have been around for a while, but have been mostly issued by lower-quality firms. However, with interest rates so much higher now, these bonds are becoming popular among the high-quality, investment-grade set. In fact, those companies have sold $12 billion in convertible bonds this year, or more than 30% of the total. That�s triple the usual rate.

Why should I care?

Zooming in: Cheaper, not cheap.
The average yield on investment-grade corporate bonds has nearly tripled over the past two years to 6%. And, sure, companies can save 2 to 3 percentage points on their interest rates by issuing a convertible instead of a traditional bond. But, any boost to their stock prices from those savings might be offset by the dilution that occurs if the bonds are converted into shares.

The bigger picture: Fond of the bond.
About $2.3 trillion of corporate debt is set to mature each year between 2024 and 2026. A lot of it will have to be refinanced. And even if firms lean more heavily toward cheaper convertible bonds, they�re still going to feel the impact of higher rates on their bottom lines ��and it won�t bode well for their stock values.