The ongoing selloff in the bond market, driven by surging Treasury yields, is presenting a dual opportunity for investors: recouping via higher yields and securing substantial tax advantages. With the 10-year Treasury yield hovering near 5%, many holders of bond mutual funds and ETFs purchased during lower-yield periods are currently sitting on unrealized losses.
While tax-loss harvesting is traditionally viewed as a year-end strategy, financial experts argue that current market conditions warrant immediate action. Joseph Gotelli and Jason Greenblath, senior portfolio managers at American Century Investments, noted in a recent report that “markets don’t follow the calendar.” They highlighted that today’s fixed-income landscape provides compelling chances to manage tax liabilities, harvest losses, and enhance portfolio yield and tax efficiency simultaneously.
Vanguard Group has also recommended regular tax-loss harvesting, particularly because record-high equity markets have made it difficult to find tax losses in stocks. The S&P 500 is up approximately 13% year-to-date, whereas bond funds like the Vanguard Total Bond Market Index Fund ETF (BND) and the iShares Core U.S. Aggregate Bond ETF (AGG) have declined more than 3.5%.
Conor Kelly, a partner at Prime Capital Financial, emphasized the urgency of the situation. “It’s an opportunity to strike while the iron’s hot because there’s no guarantee that these losses are going to stick around,” Kelly said. “You don’t want to wait until year-end because these losses could disappear or at least shrink.”
Experts caution that investors should not rely solely on an ETF’s negative price performance to determine tax liability. Bill Schwartz, managing director at Wealthspire, pointed out that cost basis analysis is critical. If shares were purchased at different times or if dividends were reinvested, the overall position might show a gain even if the fund’s price has dropped. Investors must examine the difference between current market value and their specific cost basis, including commissions and fees, to identify actual losses.
Mitch Schlesinger, chief investment strategist at Evermay Wealth Management, suggested that investors look granularly at their holdings. A portfolio may show an aggregate gain, but specific tax lots within that portfolio could be underwater. “That’s why it’s critical that you can see the tax lot detail and not just the overall gain or loss,” said Kristin Larson of NewSpring Wealth Partners.
Investors must also navigate the IRS wash-sale rule, which disallows a tax deduction if a substantially identical security is purchased within 30 days before or after the sale. While this requires careful timing, Kelly noted that the downside of waiting in cash for 30 days is generally smaller in fixed income than in volatile equities.
Finally, analysts advise against trying to time the market perfectly. Although yields spiked recently following hot economic data and expectations of further Federal Reserve rate hikes, Schlesinger warned that longer-term yields are determined by market expectations of inflation and growth, not just Fed policy. He stated, “Harvesting a loss today doesn’t mean you’re done for the year… Tax-loss harvesting opportunities are something to monitor throughout the year, not a single trade where you have to pick the perfect moment.”
Finally, a reason to check my brokerage account instead of just ignoring it. Thanks for the tip!
Everyone keeps saying ‘act now,’ but what if yields keep climbing? Waiting feels risky too.
I knew bond prices dropped, but I had no idea my specific cost basis mattered so much for the tax write-off. Helpful reminder!