Harvesting Losses into a Field of Opportunity

As the calendar pages continue to dwindle here in 2023, investors may want to take stock of their fixed income portfolio and consider how to position for the new year. One input to consider is whether any of your holdings could be headed for a loss for the current year. While we are not tax advisors, a strategy that investors have employed in the past and may want to consider now is tax-loss harvesting, if applicable, and then reinvesting into solutions that can help position your bond portfolio for what may lie ahead in 2024.

Go to the Core

Specifically, within the fixed income arena, a good place to start the portfolio review process is with one’s core holding. Typically, this core holding is either the Bloomberg U.S. Aggregate Index (the Agg) or somehow tied or referenced to it. During pre-COVID-19 days, the Agg enjoyed many years of positive performance, but more recently, the string of years in the plus column has come to an end. In fact, calendar year 2022 was arguably its worst year on record in terms of performance.

That brings us to where the Agg stands thus far in 2023. As you can see, after a volatile first eight or nine months to begin this year, performance has once again dipped into negative territory, and unless there is a bond market rally of consequence to end this year, it would appear as if the Agg could be in the negative column yet again.

So, What’s a Bond Investor to Do?

This is where repositioning for 2024 comes into play, where an investor could consider selling their current “Agg-like” position for tax loss harvesting and reallocate the funds accordingly. Based on our rate outlook of “high for longer” and the attendant heightened uncertainty that surrounds Fed policy, the time-tested barbell strategy comes into play. The barbell approach offers bond investors flexibility on the “rate call” while also providing potential income opportunities, given the “new” regime for fixed income yields.

What Should the Barbell Look Like?

In my opinion, investors should be using the “barbell” to achieve their overall fixed income duration and income needs. As a result, a combination of intermediate/core and ultra-short/short duration seems appropriate.

Our “in-house” barbell consists of the WisdomTree Yield Enhanced U.S. Aggregate Bond Fund (AGGY) at one end and the WisdomTree Floating Rate Treasury Fund (USFR) as the other “weight.” This barbell offers a core strategic solution designed to help fixed income investors navigate the uncharted waters ahead without making a high-conviction bet on where Treasury yields may ultimately be headed.