I was surprised to see my VFSUX Vanguard short term investment grade bond fund, where I have 4+ years of FIRE living expenses, drop 4-5% over the past few weeks. My thinking is that this is mostly "flight to quality" and as long as the credit crisis eventually blows over the price will go back to normal. After all, in any normal market, a fund that holds mostly A rated and some B rated bonds is pretty stable. It's just that such bonds are currently paying ridiculous interest rates because nobody is sure they'll be repaid.
At this point moving to treasuries would lock in my losses, and if I ride this out it seems clear that NAV will rise back up to normal when corporate bonds start paying in the ballpark of what they were a few weeks ago. I can't see that taking more than a year or two; the high rates that bonds are paying now are completely unsustainable long term. The real risk is of not getting the money back, but these are normal bonds not MBS and I think betting on them not being paid back is tantamount to just giving up on investing completely. If those normal, relatively highly rated bonds fail to be repaid it's pretty much game over for everyone.
But I'm really a newbie in this bond arena, so I'm learning as I go and am very interested in others opinions.