To further complicate things one might also ask "why do you want to own high quality bonds at their current price and yield?"
As mentioned above, one reason to own high quality bonds is because they provide stability. The second reason is because they tend to rise when stocks fall. But at current prices their ability to rise any further is severely limited. So that second reason doesn't apply to the same degree as it historically has.
Take, for example, the Vanguard Intermediate Term Treasury fund. It has a yield of 1.24% and a duration of 5.3 years.
If the stock market tanks we'd expect interest rates to fall. But how much can they fall from 1.24%? 100bp? That would translate into a 5% principal gain on the fund. That's not bad but it's about the limit of their ability to offset stock declines.
And how much can rates rise form 1.24%? 200bp, 300bp or more? That would translate into principal losses of 10%, 15%, or more, respectively.
That asymmetry of risk where upside is limited while the downside is not makes bonds a whole lot less valuable in a portfolio than they've been historically. Therefore one of the two reasons we own bonds is no longer very persuasive.
That leaves stability as the main reason to own bonds today. But I can get more stability from bank CDs and at higher yields too.
So maybe the best fixed income choice today isn't a class of bonds at all.
VBTLX is yielding 2.08% at the moment in spite of having a large government debt component. I don't think anyone is arguing to go only intermediate treasuries in the bond portfolio.
Practically speaking, looking at the 10 year treasury yield history, rates tend to drift up gradually as the equity markets go great guns. Current rate is around 1.83%. Over the past few years, the 10 year treasury seems to drift up to 2.5% or higher, then something spooks the equity markets and boom, rates drop suddenly again.
So while equities are partying, bond funds lag, maybe even drop a little more on interest rate rise fears. But then comes time to rebalance, so you trim from partying equities and buy some bonds.
Agreed for short-term bond exposure you definitely want to compare against cash and CD rates. For intermediate, I stick with bond funds, unless some extraordinary CD offer comes along. I also don't move to short-term bonds in anticipation of interest rate rises - I think the short term end of the curve tends to get overcrowded during this scenario, and under some conditions under performs when rate rises finally occur. And while you're waiting for the "big event" you usually receive a much lower yield.
People have been expecting big increases in rates for a long time now, but no one knows when or how. I think moves over the long term will be gradual and that sharp short term moves will be temporary followed by a recovery. It helps to look at how rates have moved since say 2000, and the actual bond fund performance during those periods.
Looking at what happened early this year, during the "taper tantrum" of mid 2013, during 2012, 2007-2009, 2004-2006 can be very instructive. 2004-2006 in particular because of the very sharp rise in Fed rates (400 bps), and intermediate funds actually did pretty well under this scenario. These blips tend to look pretty small on a fund multi-year total return graph, especially when compared to say the S&P 500 TR graph. AGG is the total bond index and has a long history.
I'm sure part of my point of view is because the bulk of my intermediate bond position dates from late 1990s/2000. And I plan (hope) to hold for decades more. When they take a hit, I'll be buying more in anticipation of when equities take a hit and bonds hold steady or gain (i.e. rebalancing).