Unrealized losses in a bond fund

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bpersm
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Joined: Wed Sep 19, 2018 12:19 am

Unrealized losses in a bond fund

Post by bpersm » Wed Sep 19, 2018 1:34 am

A few years ago I took a positions in Short Term Corp and Limited Term Tax Exempt. Both have unrealized losses (my me, and the funds) I am sitting on some large realized gains other investments and after some analysis decided that the Municipal Bonds are a better option for me. My goal is to reduce by taxable interest income which will help reduce by capital gains exposure in the future. So now I'm looking at selling STCorp and moving all the proceeds into LT Tax Exempt. I have a unrealized loss in STCorp of about 2% of my investment. I can use that this year to reduce my capital gains. When I went to do the transfer I noticed that both funds have unrealized losses. Am I losing some future tax advantage by selling ST Corp and buying LT Tax Advantage which has a much smaller unrealized loss?

Unrealized Internal Fund Losses:
Short Term Corporate: -1.8%
Limited Term Tax Exempt: -0.28%

edit for clarity
Unrealized personal loss since purchase:
Short Term Corporate: -2.0%
Limited Term Tax Exempt: -1.3%

After thinking about this I'm think that these unrealized losses are included in the price of the funds. When I sell the fund I will realize the loss which is already reflected in the price. Therefore these unrealized losses are of no consideration.

Is this correct?

Thanks.

PS: edited for clarity, added personal losses along side internal fund losses. the question is am I missing out on using internal fund losses. I don't think I am but want to be sure
Last edited by bpersm on Wed Sep 19, 2018 2:56 pm, edited 1 time in total.

PFInterest
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Re: Unrealized losses in a bond fund

Post by PFInterest » Wed Sep 19, 2018 8:00 am

if you have losses, you should TLH them.

livesoft
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Re: Unrealized losses in a bond fund

Post by livesoft » Wed Sep 19, 2018 8:19 am

I own a couple short-term corporate bond index funds, but not in taxable accounts. I'd sell to realize the losses and not buy ST Corp Index again in taxable if I was in a tax bracket where using intermediate-term munis fund made sense.

So some confusion: Limited-term tax exempt and LT tax-exempt mean 2 different funds to me since the Long-Term Tax-exempt fund exists.

Sell all losers and buy Intermediate-term tax exempt. Later on, when Intermediate-term tax-exempt ends up with its loss, sell it and buy limited-term tax-exempt.
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bpersm
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Re: Unrealized losses in a bond fund

Post by bpersm » Wed Sep 19, 2018 2:53 pm

PFInterest wrote:
Wed Sep 19, 2018 8:00 am
if you have losses, you should TLH them.
Yes, that is what I am doing. But there are two types of unrealized losses, those incurred by me, and those that are internal to the fund. I am trying to confirm that I am not missing out on TLH on internal losses (I know I can TLH based on my personal losses since purchase).

This is kind of the inverse of the problem of buying a fund that has unrealized gains, then 2 months later the fund makes a large Capital Gains Distribution and you get hit with unexpected taxes even though you didn't personally realize gains.

bpersm
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Re: Unrealized losses in a bond fund

Post by bpersm » Wed Sep 19, 2018 3:02 pm

livesoft wrote:
Wed Sep 19, 2018 8:19 am
Sell all losers and buy Intermediate-term tax exempt. Later on, when Intermediate-term tax-exempt ends up with its loss, sell it and buy limited-term tax-exempt.
Thank you for pointing out the confusion in using abbreviations.
I already have a large position in Intermediate Term Tax Exempt. I bought these shorter term funds with the explicit intention of reducing interest rate exposure.

livesoft
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Re: Unrealized losses in a bond fund

Post by livesoft » Wed Sep 19, 2018 3:07 pm

I don't think you are going to hurt yourself by popping into interm-term for 31 days. Besides you probably have to TLH some of your interm-term at that point anyways.
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bpersm
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Re: Unrealized losses in a bond fund

Post by bpersm » Wed Sep 19, 2018 3:23 pm

Yes that is a possibility, but I wasn't even considering taking a larger position in Intermediate-Term tax exempt as my intention is to reduce interest rate exposure. My initial plan was to simply TLH Short Term Corp and move into Limited Term Tax Exempt. But you are right, I should probably take the loss on both since I will have large gains this year. Maybe I will sell both and use Short Term Muni. I already have a relatively large gain in intermediate term tax exempt as I've been using that fund for many years. (LT gain ~6%).

Thesaints
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Re: Unrealized losses in a bond fund

Post by Thesaints » Wed Sep 19, 2018 3:27 pm

Yes, you are missing out on the losses incurred by the fund.
While gains have to be distributed to investors within the same year, with the new legislation losses can be held by the fund indefinitely and used to offset future gains.

Yet, that should be rather inconsequential for you, since those bonds don't usually distribute capital gains anyway.

bpersm
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Re: Unrealized losses in a bond fund

Post by bpersm » Wed Sep 19, 2018 3:48 pm

Thesaints wrote:
Wed Sep 19, 2018 3:27 pm
Yes, you are missing out on the losses incurred by the fund.
This is what I'm trying to understand. Since the internal losses are based on NAV the magnitude of the losses are already incorporated into the price. Since my loss since purchase is larger than the internal loss of the fund aren't I capturing all that loss when I sell? Sure future gains are possible w/o tax consequences but that's also true based on my purchase price, in fact more so.

livesoft
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Re: Unrealized losses in a bond fund

Post by livesoft » Wed Sep 19, 2018 3:51 pm

It appears you may be using average cost for the basis. Selling all shares could allow you to use specific identification for the cost basis method when you restart a position from scratch in a month or so. Using a short-term muni in the meantime is a good idea.
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bpersm
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Re: Unrealized losses in a bond fund

Post by bpersm » Wed Sep 19, 2018 4:10 pm

Yes, the plan is to close out the position. I don't see how using specific shares to calculate losses is helpful since the wash rule is based on the sale date. Moving in/out of Limited Term Tax Exempt is something I didn't consider and is a good idea. I can simply use ST Tax Exempt or Tax Exempt MM in the mean time. Thank you for that idea. I've been investing for decades and don't trade often. I've never used the wash rule to my advantage (that I can remember). There is usually a similar fund available that serves the same purpose.

livesoft
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Re: Unrealized losses in a bond fund

Post by livesoft » Wed Sep 19, 2018 4:32 pm

We don't know what will happen to bond fund NAVs in the near term, but I will make a prediction anyways:

Bond fund NAVs have dropped about 1% in the past month despite the known FFR hike that will be announced September 26, I expect a "relief rally" that afternoon when the shoe actually drops. So anybody who sells now and goes to shorter duration will probably underperform doing nothing.

If I was TLHing bond funds this month, then I would make sure that either (a) I waited until September 27 to start selling or (b) I made sure that I shifted to intermediate-term on any drop of 0.4% or more in a single day that occurred before September 26. That is, I would not shift to a short-term fund and hold across the Sept 25-26 days because a short-term fund won't go up as much as an intermediate-term fund will.

I think another reason that interm-term funds have dropped is because of increased inflation due to tariffs and essentially full employment. These are reasons for the increase in FFR, too. Tea leaves readers will look at the September FOMC announcement to see if an additional hike not yet telegraphed for 2019 is more probable.
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bpersm
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Re: Unrealized losses in a bond fund

Post by bpersm » Wed Sep 19, 2018 4:57 pm

That's a reasonable consideration and I have until year end to make the change, although the sooner the better to realize lower taxable income from dividends on ST Corp. Thank you for your comments, they are helpful.

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