hold to maturity is the standard advice on this forum and everywhere else. and I get the reasoning. you lock in the yield, you avoid mark to market stress, you keep it simple. but surely there are situations where exiting a bond before maturity is actually the smart move? curious what those scenarios actually look like.
there are a few legitimate scenarios. the most compelling one is when rates have fallen significantly since you bought. if you bought a 5-year bond at 9% and two years later 3-year bonds are yielding 7.5%, your bond’s market price has risen to reflect the scarcity of your higher coupon. you could sell at a capital gain, take the 12.5% LTCG tax, and the after-tax gain might still exceed the remaining coupon income you would have earned by holding. it requires calculation but it is not automatically wrong.
so the main case for early exit is locking in a capital gain when rates have fallen. what are the other cases
A second scenario is credit deterioration. If a bond you hold gets downgraded repeatedly and you see early warning signs of genuine financial distress in the issuer, selling at a modest discount in the secondary market is better than waiting to find out how a default plays out. The market will price in the deteriorating credit before the rating agencies fully catch up. Exiting while the bond is still trading reasonably is often better than waiting for a recovery that may take years.