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Bonds, Chicago Style

Ken Volpert, senior portfolio manager and head of Vanguard's Taxable Bond group, answered our 10 Questions.

Morningstar Advisor, 08/23/2010

What do you make of all the money that has been pouring into bond funds for more than a year now?
I don't make a lot of it. I think it's a logical thing for investors to have been doing in this environment.

Are the best days for bonds behind us?
No, I don't think so. Bonds continue to offer an attractive diversifier with equity investments. They also provide a steady income stream. Baby boomers moving to retirement are going to need income streams. Bonds are going to be a very important part of that.

Which concerns you the most: rising interest rates or credit defaults?
Right now, I'm not that concerned about rising interest rates. We have a lot of capacity, we have low inflation, and I think interest rates will stay low. But we do have a slow-growth economy, so I am more concerned about credit defaults and making sure that in our active funds we are picking bonds that will be the survivors.

Is inflation a near- or long-term concern?
Definitely a long-term concern. I don't think it's a near-term concern at all.

Are TIPS attractive investments currently?
We have a period when inflation will be running around 1% to 1.5%. For TIPS to perform as well as conventional Treasury securities, we need to have closer to 2% inflation. So TIPS will be an underperforming asset for the next couple of years. But over the long run, TIPS will probably do pretty well, because down the road, we're more likely to have inflation.

What are the biggest advantages that a bond-index fund gives investors over active bond funds?
Lower expense ratios and turnover, so it doesn't have as many brokerage commissions and transaction costs in it.

What's the most common mistake bond investors make?
Chasing past performance. The bond market moves in cycles. If you're buying what performed the best in the prior year, you're more likely to be getting in at the wrong time.

What got you first excited about bonds?
FIN 150, a finance class at the University of Illinois. I fell in love with that whole concept of present value and interest on interest.

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