VANGUARD: Here Are 3 Reasons Why You Should Still Own Bonds

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Amid concerns of a Fed taper, investors pulled a record $23.3 billion from bond funds in the week ending June 26.

Bank of America's Michael Hartnett dubbed it a 'bond market liquidation' in a note to clients.

But Joe Davis, chief economist at Vanguard, still owns Treasuries.

Back in March 2012, when investors were reallocating their bond portfolios, Davis wrote that he was sticking to his overall bond allocation, including Treasury bonds.

In a new webcast, Davis reiterates the arguments made in that piece. He says there are three key reasons to hold on to Treasuries:

"...It was, one was just because interest rates are low does not mean that they have to rise tomorrow and, again, that was more than two years ago and so it’s taken some time for rates to rise, and who’s to say if they’re going to rise immediately the next two days, either? 

"Secondly is that with low interest rates, that did imply muted return for bond portfolios over the next several years, and that there was more risk of a one-year or one-month loss going forward than there had been over the past 30 or 40 years just because the low-income cushions in those portfolios, and that has played out at least in the past day or two, and then, finally, most importantly, and why I still own U.S. Treasury bonds as part of a broadly diversified portfolio, is that bonds are just inherently, as a broad asset class, less volatile than equities, and that played out yesterday. Equities were down more than fixed income even though rising rates was the source of the concern, and so that’s just the broad tenet.

"I think for all of us, we just have to know and realize why we own fixed income securities in a portfolio, and the one thing that I would say that would be different is that rates today are slightly higher than they were at that post. And so, if anything, that would imply a slightly higher expected return going forward for bonds than at the time we did that."

Davis believes that investors need to have "explicit Treasury exposure" to have a balanced portfolio. 



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