Fall harvest: Turn a down year for bonds into something good for clients

The recent rise in interest rates has created a unique opportunity for advisors to reassess not only their fixed income allocations, but their portfolios more broadly. Many bond investments are currently sitting on unrealized losses that can be harvested for a tax benefit, creating flexibility to make overall portfolio changes that might otherwise trigger taxable gains. This is a great opportunity for advisors to create value for their clients.

The opportunity: Over the past 50 years (including year-to-date), the number of years where investors experienced positive price returns in equities versus negative returns in bonds (proxied by the Bloomberg Aggregate Index, “Agg”) is 38%. More tellingly, it’s rare to have opportunities where double-digit gains in stocks (S&P 500) are paired with mid-digit losses in bonds (5% or more). This confluence has occurred four times in the last 50 years (see chart below). Also, the Agg’s current price losses (assuming YTD losses of 5.87% hold for the rest of the year) sit 42nd when ranked out of the last 50 years, with 2022 being the worst in that time frame. 

Vanguard’s seminal Advisor’s Alpha® research indicates that a robust tax-loss harvesting plan can generate up to 150 basis points or more in returns over time.¹ In conversations with advisors, we see three primary ways to take advantage of the current environment.

Rebalance and re-align portfolios

Strong equity returns over the past several years, combined with lower bond prices, have caused many portfolios to drift away from their target allocations.

• Equity allocations may now exceed strategic targets. For example (see graphic below), an investor who has not rebalanced an initial 60% stock/40% bond portfolio now has a portfolio that is nearly 75% in stocks just five years later.
• Realizing bond losses may provide an opportunity to offset stock gains while simultaneously allowing advisors to achieve a better balance between stocks and bonds in portfolios where allocations may have drifted due to market returns. In this case, rebalancing would mean selling stocks to buy bonds, and investors would also need to sell bonds to realize losses to offset the equity gains. The proceeds from both the stock and bond sales could be used to reallocate to more bonds to address the allocation drift. Investors just need to be sure to buy a different bond fund that avoids the wash-sales rule.
• Rising yield levels also mean there is more value to squeeze out of fixed income towards your clients’ goals. Advisors can use tax-loss harvesting to help bring portfolios back in line with long-term objectives while potentially reducing tax consequences.

Source: Bloomberg, as of October 2, 2026.

Reassess fixed income positioning

The bond market looks very different today than it did several years ago, especially the last time there were losses to be harvested in 2022. Today, harvesting these losses can create flexibility to reposition fixed income allocations to benefit from the current bond market while helping offset gains elsewhere in the portfolio.

• The current environment provides multiple iterations to reposition fixed income exposures. Advisors that have been long duration that want to reposition shorter can do so while harvesting losses that can affect gains elsewhere. Advisors that have been positioned in shorter duration instruments may want to extend in order to add equity diversification. Given negative price returns across the curve, taxes are currently less of a deterrent.
• Attractive income is available across much of the yield curve. If you are looking for equity risk diversification, you would want more duration in your fixed income portfolio. Meanwhile, if your goal is stability, then a shorter-duration fixed income portfolio is more appropriate. Either way, you can use the opportunity to harvest losses to reach your optimal duration position now.
• With yields so attractive, there is a much higher cushion for rates to rise without experiencing negative total returns. For example, the yield-to-worst of the Bloomberg U.S. Aggregate Index now stands at 5.56%.² Interest rates would need to rise almost 100 basis points before investors would see a loss in total return.³

Tax-loss harvesting opportunities may be found across the curve, but they are most prominent in intermediate to long duration. For example, ETFs in the 1–3 year duration range have an average price loss of –3.14% year-to-date (asset-weighted), while those with a 3–7 year range have an average price loss of –5.85% (asset-weighted).⁴ The losses only climb as duration increases. Point being, check your longer duration products for more potential losses to harvest.

Source: Ycharts as of October 2, 2026.

Optimize implementation

Some advisors may be comfortable with their strategic allocation but see opportunities to improve how it is implemented. Here are some opportunities:

• Evaluate whether the current mix of ETFs, mutual funds, active strategies, and index strategies remains appropriate. In 2022, many investors took advantage of the losses to shift from mutual funds to ETFs. This could be an optimal moment to get into the vehicle or fund you prefer without taking the tax hit. It could save investors in the long run too, since active fixed income ETFs carry expense ratios that are 15 basis points lower than comparable active fixed income mutual funds.⁵
• Consider opportunities to simplify holdings or improve portfolio tax efficiency. For example, switch to municipal bond funds or ETFs to provide tax-exempt income, or exchange individual bonds for ETFs like Target Maturity ETFs designed to mature like an individual bond but with the greater diversification and liquidity that ETFs provide.
• Harvest losses while maintaining similar market exposure through appropriate replacement investments. Remember that all replacement investments cannot be “substantially identical,” or they could be disqualified under the Internal Revenue Service’s longstanding wash-sale rules.

Markets change. Portfolio assumptions should too. Connect with a Vanguard portfolio strategist to review your allocations and identify opportunities that may help strengthen portfolio positioning in today's market environment. Request a consultation.

1 Vanguard Investment Advisory Research Center, Celebrating Vanguard Advisor’s Alpha: Clients and their advisors thriving together for 25 years, Valley Forge, Pa., 2025.

2 Bloomberg, as of September 30, 2026.

3 Vanguard calculations using Bloomberg data, as of October 2, 2026.

4 Vanguard as of September 30, 2026.

5 Morningstar, Inc., as of August 31, 2026.

Notes:

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Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.

Investments in bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

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