Zero-Interest Convertible Bonds Approach a $73 Billion Record
AI-linked issuers are using equity volatility to borrow without coupons, while capped calls shift the cost into more complex structures.
Companies have issued $72 billion of zero-interest convertible bonds in 2026, putting the market within reach of the $73 billion full-year record set in 2025. The surge shows how issuers, particularly businesses exposed to artificial intelligence spending, are turning equity volatility into a substitute for cash interest.
A convertible bond combines debt with the right to exchange the bond for shares at a predetermined price. The equity option becomes more valuable when a company's stock is volatile because sharp gains increase the chance that conversion will be profitable. Issuers can capture that option value by offering a lower coupon. In the hottest part of today's market, they are offering no coupon at all.
Dealogic data reported by the Financial Times show zero-coupon securities account for about 41% of global convertible issuance this year. The United States dominates activity. More than $113 billion of converts had been sold there by the end of last week, close to the $120 billion record for all of 2025, according to Barclays Research.
AI-linked borrowers are central to the boom because their shares combine strong investor demand with large price swings. Semiconductor company ON Semiconductor sold $1.3 billion of zero-coupon notes in May. Optical-networking group Ciena issued almost $2.9 billion in June. These companies are financing investment at a time when conventional borrowing is expensive and capital requirements remain high.
The economics are appealing to both sides, but they are not free. Investors give up current income in exchange for potential equity upside and repayment at maturity if the shares fail to reach the conversion level. Issuers avoid interest expense but accept possible dilution if their stock rises enough for bondholders to convert.
Higher benchmark yields make that bargain harder to sustain. The yield on the 10-year US Treasury has risen from 4.15% to 4.66% this year, increasing the income investors sacrifice when they buy a zero-coupon security. To compensate them, issuers may have to lower the conversion premium, which makes conversion and shareholder dilution more likely.
Companies are increasingly using capped-call transactions to manage that risk. An issuer pays a bank for an option that offsets dilution between the bond's conversion price and a higher cap. About $68 billion of convertible deals have included capped calls this year, a record, according to Dealogic.
Cloudflare's August financing illustrates the structure. It sold $2.5 billion of zero-coupon converts with a conversion price 60% above the prior closing share price and bought capped-call protection extending to 175% above the issue price. The arrangement limits dilution across a wide range of gains, but the hedge is funded from the bond proceeds and therefore reduces the net capital available to the company.
The boom also carries a market-cycle warning. Zero-coupon converts work best when investors believe high stock volatility will persist and that the issuer's shares retain meaningful upside. If volatility falls, the embedded option can prove less valuable than expected. If share prices decline, holders are left with low-yielding credit exposure and no equity payoff.
Credit quality still matters. A convertible is not a risk-free option. Investors rely on the issuer to repay principal if conversion never becomes attractive. For fast-growing companies with heavy infrastructure spending and modest free cash flow, that repayment claim can become important if the equity story weakens.
Why it matters
The record pace is changing how the AI investment cycle is funded. Equity markets are allowing volatile companies to borrow without paying cash interest, extending their ability to finance data centers, chips and networking equipment even as ordinary debt becomes more expensive.
For shareholders, low coupons can preserve cash and reduce near-term financing pressure. The trade-off is complexity and contingent dilution. Capped calls soften that exposure, but shift risk to bank counterparties and consume proceeds at issuance.
For investors, the market offers a hybrid claim that can participate in equity gains while retaining debt seniority. The price of that optionality is foregone income and sensitivity to assumptions about volatility, credit and conversion terms. A record year therefore signals both strong financing capacity and a growing dependence on buoyant equity expectations.