A 93-year-old investor heard something new from his adviser. Sell some of your bonds, the adviser said, and use the losses to cut the tax on your stock gains. For years the man had hunted for losers only among his stocks. He said nobody had ever told him this. Jim Caron of Morgan Stanley told him why. For about 40 years, rates mostly went straight down, so bonds rarely sat at a loss. This year many do.
That story sits inside Barron's Guide to Wealth, reprinted in the Tuesday, Oct. 20 Journal from the Oct. 12 issue, so its figures are a week old. The 10-year Treasury yield hit 5.36% on Oct. 7. That was the highest in nearly 25 years, and more than a full point above a year before. By Monday, Oct. 19, it had eased to 5.135%, by the Journal's own table. Barron's points to a mountain of borrowing behind the jump. Global debt passed $365 trillion. U.S. government debt passed $40 trillion. And companies are borrowing hard to build AI, with Morgan Stanley expecting about $570 billion of AI-related debt this year. “Whenever the cost of capital moves this far, this fast, one should expect breakage,” wrote Lisa Shalett of Morgan Stanley.
Stay short, let it float
Patti Domm's pros mostly agree on one thing. Keep bonds short. Michael Arone of State Street calls one- to five-year maturities the sweet spot. Jack Ablin of Cresset points to the iShares 1-3 Year Treasury Bond ETF (SHY). In Barron's table from the Oct. 12 issue, it showed a 4.43% 30-day SEC yield for a 0.15% fee. The SEC yield is a standard way to show a fund's recent income. Floating-rate funds get a nod too, among them the WisdomTree Floating Rate Treasury fund. Their payouts reset as rates move. Russ Brownback of BlackRock says he's happy to “sit back and clip the coupon.” Ablin also likes a bank-loan fund near 6.9% and a short high-yield fund near 7.1%, as of that issue. Those pay more because they carry credit risk, the chance a borrower doesn't pay. Bond losses from the past few years can offset stock gains. For savers in high tax brackets, Shalett mentions munis like the iShares National Muni Bond ETF (MUB).
Barron's also asked four advisers what they're changing. Christian Salomone of Ballast Rock is trimming long bonds for intermediate TIPS. Duration measures how much a bond's price swings when rates move. He'd think about adding a little of it if the 10-year reached about 5.5%. Sheena Pauley of MAI Capital is moving stock gains into laddered, investment-grade bonds, since many clients are overweight stocks and the AI trade. Stephen Kolano of Integrated Partners is lighter on small caps, whose debt must be refinanced every four or five years. Andy Wang of Runnymede says better-quality bonds now pay real income, “especially relevant for clients approaching retirement.”
Our read
Fixed Income · IN02, with Retirement M10 and Tax in the mix. This piece lines up with how we run safe money. Our model books keep it in Treasury bills (SGOV, 49 books) and floating-rate Treasurys (USFR, 14 books), held at weight; nothing added. We've avoided long bonds. TLT sits in 4 older books, untouched. The muni fund Barron's names, MUB, is in 2 books. For readers who follow Islamic rules, interest-paying bonds aren't Shariah-compliant. Sukuk funds are the analog, and SPSK is held in our 3 faith-based books.
Here's the connection to your own money. Find the bond fund or bond ladder in your 401(k), IRA or taxable account. Look hardest at anything bought from 2020 through 2022, when yields were low. This week, open the statement and compare what you paid with what it's worth now. In a taxable account, selling a loser before Dec. 31 can offset a stock gain. Just don't buy the same or a nearly identical fund within 30 days before or after the sale. In a retirement account, losses don't count for taxes. Check the fund's duration instead, and see whether it's under five years. Bring the statement to your next review, and we can look at it together.