Ten-year yield hits highest since 2007

The ten-year treasury yield surged above five percent and hit its highest level since two thousand seven, sending bond prices into steep losses.

Bond fund investors sitting on losses

Investors who bought bond mutual funds or ETFs when yields were lower now hold unrealized losses they can use to offset capital gains elsewhere.

Don't wait until December to harvest

Tax-loss harvesting is often treated as a year-end exercise, but markets do not follow the calendar. Higher yields create opportunities to harvest losses now.

“Tax-loss harvesting is often treated as a year-end exercise. But markets don't follow the calendar.”

American Century and Vanguard alert investors

Fund companies including Vanguard Group and American Century Investments have been alerting investors to this tax strategy, though careful analysis is critical.

Stocks up thirteen percent, bonds down

The S and P five hundred is up about thirteen percent year-to-date. For many clients, the bond side of the portfolio is the only side that is down.

Major bond ETFs down more than three point five percent

The Vanguard Total Bond Market Index Fund ETF, ticker B N D, and the iShares Core U S Aggregate Bond ETF, ticker A G G, are both down more than three point five percent year to date.

Losses may not stick around

There is no guarantee that current losses will remain. Waiting until year-end risks losses shrinking or disappearing as bond prices potentially recover.

“It's an opportunity to strike while the iron's hot because there's no guarantee that these losses are going to stick around.”

Check your cost basis first

Do not assume you have a tax loss just because an ETF has a negative price return for the year. You must calculate the difference between current market value and your cost basis.

“It's not automatic that you'll have a tax loss just because an ETF has a negative price return for the year.”

Reinvested dividends increase cost basis

When you reinvest dividends and interest, you buy more shares of an investment, so your overall cost basis increases. Your brokerage firm should track this for you.

Look at individual tax lots

Even if your entire position shows a gain, specific tax lots within it could be sitting at a loss. Advisors recommend looking granularly within funds for harvesting opportunities.

“That's why it's critical that you can see the tax lot detail and not just the overall gain or loss.”

An investor bought in two thousand seven

An investor who bought an ETF in two thousand seven might overall have substantial gains, but individual lots purchased at different times could show losses.

Beware the wash-sale rule

The IRS wash-sale rule disallows a tax deduction for a loss if you purchase a substantially identical security within a sixty-one-day window, thirty days before or after the sale.

Bonds easier to sit out than stocks

There is less downside in bonds to sitting on the sidelines for thirty days. The downside to sitting in cash is limited compared with sitting out volatile stocks.

“In fixed income, simply sitting in cash for thirty days before repurchasing is much easier than sweating out sitting out of a stock for thirty days.”

Fed raised rates, more hikes expected

The Federal Reserve raised interest rates last week and indicated at least one more hike this year. Yields spiked on Wednesday after economic data came in hot.

Today's loss is known, tomorrow's is not

The loss you have today is known; the loss you might have tomorrow is not. Harvesting a loss today does not mean you are done for the year.

“The loss you have today is known; the loss you might have tomorrow isn't.”

Fed funds rate differs from longer yields

The Fed's actions focus on the short-term Fed Funds rate. Longer-term Treasury yields are set by the market and reflect expectations about inflation and economic growth.

Higher Fed rates could lower long yields

If investors believe additional Fed hikes will slow the economy and bring inflation down, longer-term yields could stay flat or decline, and bond prices could recover.

“If investors believe additional Fed hikes will ultimately slow the economy and bring inflation down, longer-term yields could stay where they are or even decline.”

Harvest meaningful losses while you can

Do not try to perfectly time the bottom in bond prices. If there is a meaningful loss today and you can harvest it while maintaining desired investment exposure, take the opportunity.

“I wouldn't try to perfectly time the bottom in bond prices. If there's a meaningful loss today and we can harvest it while maintaining the investment exposure we want for our clients, there's value in taking the opportunity that's in front of us today.”