Is Your Fixed Income Manager Delivering Tax Alpha?

The Bloomberg US Aggregate Index returned 1.25% in 2024, with sharp ups and downs in month-to-month performance. Over the course of the year, index returns ranged from sharply negative (-2.53% in April) to strongly positive (+2.34% in July). In our view, these market swings can provide promising opportunities for harvesting tax assets.

Once again, as in previous years, waiting for December to realize losses wouldn’t have been ideal. Instead, we found that a systematic approach to harvesting losses year-round turned out to be a better way to manage tax efficiency in client portfolios. Third-party research has shown that tax management can add 1%–2% in after-tax excess returns for equity and 0.3% for fixed income.1 This is known as tax alpha.

In 2024, Parametric sold over $14 billion in market value across fixed income portfolios to realize $299 million in net losses.2 As a result, many of our clients have benefited from locking in potential tax savings, while still maintaining their exposure to the market as intended.

When we compare the 10-year municipal index yield to Parametric’s tax loss harvesting activity within municipal portfolios, we can see that as market yields increased, so did our weekly harvesting activity.

Weekly loss harvesting activity in 2024

Weekly loss harvesting activity in 2024

Looking ahead, we don’t expect tax loss harvesting opportunities to fade in 2025. Along with uncertainty around the new administration’s fiscal discipline and the policies they implement, the path of monetary policy will continue to create pockets of short-term adjustments in yields. By systematically and proactively implementing an active approach in fixed income investing, clients may be able to weather volatility better, while also enhancing after-tax value in their portfolios—a critical consideration for today’s tax-sensitive investors.