Global issuance of zero-interest convertible bonds is set to reach a record high this year, driven largely by investment demand linked to artificial intelligence (AI) companies. Data from Dealogic indicates that firms have already issued approximately $72 billion in zero-coupon convertibles in 2026, nearing the previous annual peak of $73 billion previously projected for the full year.

Convertible bonds grant investors the option to exchange the debt for equity at a predetermined price, a feature whose value increases with the volatility of the underlying stock. This attribute has made zero-interest convertibles particularly appealing in the AI sector, where share prices have experienced pronounced volatility due to rapid and significant market movements. Investors appear willing to forgo coupon payments in exchange for the potential upside of converting to equity at favorable terms.

"The companies coming to this market now are far more volatile than the ones they replaced," said Nicolas Crémieux, head of convertible bonds at Mirabaud Asset Management. "If you’re selling something more valuable, you can offer less for it."

Several prominent issuers in the AI and semiconductor space have taken advantage of the zero-coupon format this year. ON Semiconductor issued $1.3 billion of notes in May with no interest, while Ciena Corp, a software and optical networking firm, raised nearly $2.9 billion in June under similar terms. These offerings underscore the growing role of convertible bonds as a financing tool in an environment where borrowing costs have risen globally.

Yields on 10-year U.S. Treasuries have climbed from around 4.15% to 4.66% during the year, prompting issuers to seek innovative financing methods to reduce coupon expenses. Dorian Carrell, head of multi-asset income and co-manager of convertibles at Schroders, noted that companies are aiming to minimize financing costs while limiting shareholder dilution and preserving credit ratings. "The incentive is higher to go for a zero coupon," Carrell said.

Overall convertible bond issuance has surged as AI companies allocate hundreds of billions to infrastructure development, often requiring substantial funding despite limited current cash flow. Barclays Research reported that over $113 billion of convertible bonds have been issued in the U.S. this year, approaching the $120 billion all-time high for a full year.

Investor appetite has pushed down coupon rates, rendering zero-interest convertibles capable of making up about 41% of all convertible issuance in 2026. However, rising bond yields have also led investors to demand greater compensation for accepting no coupon, often resulting in issuers lowering the conversion price premium—the threshold at which bonds convert to stock—to attract buyers.

To mitigate equity dilution for existing shareholders, companies commonly secure capped calls from banks alongside these bond issuances. A capped call limits potential dilution by allowing the bank to compensate the issuer if the stock price rises above the conversion price up to a set cap. While this structure helps reduce cost of capital, it is not without expense, as the capped call must be purchased using proceeds from the bond offering.

Carrell explained, "The only way you can issue at zero coupon is to minimize your premium when you print the bond, and the only way to protect your shareholders therefore is to use the capped call. It reduces the coupon cost, but it’s not costless."

Examples include Cloudflare’s $2.5 billion convertible note issuance in August, which came with a zero coupon, a conversion price set 60% above the prior day’s share price, and a capped call at 175% of the issue price. Similarly, Amkor Technology sold $1.15 billion of zero-coupon convertible bonds in April, with a conversion premium of 52.5% and a capped call at 100% above the issue price.

The total amount of convertible bonds accompanied by such anti-dilution measures is on track to break records in 2026, with $68 billion already issued, underscoring the prevalence of these structures within the market.

Market experts caution that while zero-coupon convertibles offer attractive optionality linked to equity volatility, their appeal depends heavily on continued stock price fluctuations. Crémieux noted, "Investors are giving up coupon because they’re being paid in optionality instead. If single stock volatility collapses, they’ll have bought something they didn’t receive, and that’s when terms turn."