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Life below par

Not so long ago, when the developed world was living in a zero interest world for the first time in 5000 years, a significant percentage of government bonds and some corporates, had negative nominal interest rates. CFOs used that window to issue long term bonds are very low rates and the market, hungry of income, absorbed everything they issued. Some of those bonds are still alive today, and because global central banks have increased official rates aggressively, and the curve has moved, 91% of investment grade bonds are trading below par value. As you can see, over the last 10 years, and probably beyond that, there was never a period like this one. Two implications: first, a bigger part of the total return comes from the return OF your money, as opposed to the return ON your money. And secondly, durations are high, compared to other periods in history, which means that the sensitivity to interest rates is bigger than any recent period in history.

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Chart source: Apollo

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