With interest rates so low today and maybe moving higher, investors may wonder: why own bonds at all?

To answer that question, it is helpful to revisit why bonds have been a building block of portfolios for generations of investors.

Investment grade bonds are safe investments that preserve capital.
Bonds generate income.
Bonds help to diversify a stock portfolio.

This diversification benefit is especially important today. As the global economy and markets become more integrated, it becomes more difficult for investors to achieve a high degree of diversification. As the adjacent chart indicates, many types of investments increasingly resemble each other in their performance pattern, while investment grade bonds continue to move independently from the stock market. Accordingly, investment grade bonds are important holdings for conservative investors who desire broad diversification.

We recommend that investors diversify their bond portfolios to include a variety of sectors. High yield corporate bond funds, floating-rate bank loan funds, and high yield municipal bond funds can all play a role in portfolio. Although these riskier sectors do not offer as strong diversification benefits to stocks, they do offer higher income today.