Japan’s Convertible Bond Market Draws Hedge Fund Interest

Japan’s convertible bond market is attracting renewed interest as higher borrowing costs make zero-coupon issuance more appealing and create new opportunities for convertible bond arbitrage. Eagles View Japan Management returned 24% in 2025 and has gained more than 20% so far in 2026.

Convertible bonds combine debt with an option to buy a company’s shares. Higher interest rates have enabled Japanese companies to issue some of the securities without paying a coupon. The strategy has also benefited from rising Japanese equity prices, increased corporate investment and the Bank of Japan’s response to higher inflation.

Chris McGuire, who founded Phalanx Capital Management in 2004, now runs Eagles View Japan Management. The fund invests across industries, including airlines, railways, steel companies and a company involved in removing space debris.

McGuire uses asset swaps to separate the fixed-income component of a convertible bond from its equity option. That allows the fund to focus on changes in the value and volatility of the underlying shares. Japan’s relatively strong credit quality supports the market, although the limited number of high-yield and highly volatile issuers can restrict potential returns.

Japan’s convertible bond market is worth about $20 billion, compared with roughly $400 billion in the United States. Taiwan and Hong Kong each have markets of more than $100 billion. McGuire described Japan’s smaller market as an advantage for specialist funds because large hedge funds seeking to invest tens of billions of dollars cannot deploy that capital without affecting the available capacity.

Convertible bond arbitrage was once a major hedge fund strategy. Ken Griffin built the early foundations of Citadel by trading convertible bonds while studying at Harvard and exploiting differences between bond and share prices. Japan’s market was worth more than $350 billion during the strategy’s earlier expansion, with nearly 1,000 issues across a broad range of industries.

The strategy became harder to operate after the global financial crisis. Investor redemptions and industry-wide deleveraging reduced available capital, while short-selling restrictions limited arbitrage opportunities. The Bank of Japan’s easing policies and negative interest rates from 2016 added pressure because investors could buy conventional debt at very low cost instead of using convertible bonds for equity exposure.

McGuire left the investment industry before returning with Eagles View Japan Management several years ago. He described Japan’s market as different from those of China and other Asian economies because of its liquidity, company structure and broad issuer base. The Nikkei 225 has risen about 115% over the past five years, although McGuire said investors often assess Japanese companies using assumptions based on Western markets.

“Companies and markets behave differently in Japan,” McGuire said. He also pointed to differences in the relationship between public institutions and private companies as a factor affecting market behavior.