Dimensional global head of fixed income Dave Plecha said an historical analysis shows "there is no guarantee that longer-term bonds will underperform shorter-term bonds and cash when interest rates are rising".
"Saying that interest rates can only go up from here doesn’t tell you anything about how your fixed income portfolio will perform in the future," said Mr Plecha.
"Interest rate expectations are already baked into prices. What happens from here we don’t know, which is why it still makes sense to have an allocation to bonds," he said.
Dimensional has carried out a case study of four periods of rising rates from the last 30 years: December 1976 to March 1980, September 1992 to June 1995, November 1998 to December 2000, and June 2003 to August 2007.
In two of the periods (1992-1995 and 2003- 2007) long-term bonds actually did better than short-to-intermediate term bonds, according to Dimensional.
"This may seem counter-intuitive, but it makes sense if you remember that bond holders can be comforted by pre-emptive action against inflation," said Mr Plecha.
In three of the four periods studied, bonds delivered positive returns – pointing to the diversifying role they can play in a portfolio, he added.
"Don’t get me wrong: bonds are risky assets too. But how much risk you take should depend on your own appetite and investment goals, not what is happening in the markets at any one time," said Mr Plecha.
