Getting Good Bond Prices
If you ever had any dealings in the bond market, then you know that the idea of price transparency is for the most part merely a myth. Ordinary investors, as opposed to giant institutions, often end up settling for whatever price their broker palms off on them. You might end up paying a markup of 0.25 to 3 points over what the broker paid for the bond.
There are ways around this problem of course. For instance, you can always restrict your purchases to new-issue bonds, where you pay the same price as a large mutual fund. But what if you insist on buying bonds in the secondary market? Then there are two facts that you had better bear in mind.
First of all, it is important for you to know in what capacity your broker is acting whenever you purchase bonds in the secondary market. It turns out that in any such transaction, your broker will either be acting as a principal, or as an agent. It is very important that you understand this because when your broker acts as principal, this means that the brokerage is participating in underwriting the issuance of the bonds in question, and in that capacity, the broker is not required to divulge the mark-up that he/she is adding to the price of the bonds... When the broker is acting as agent, this means that the brokerage must go out and purchase the bonds for your account, and in this instance the SEC requires that the brokerage must show the amount of mark-up on the Advice that accompanies your trade.
The second fact to bear in mind whenever you deal in the secondary bond market is that you can find out a lot of very valuable information just by logging on to the Bond Market Association's Web site, www.investinginbonds.com (which is included among our Links) and use the new and improved Trace system. Trace is an acronym for Trade Reporting and Compliance Engine, which mainly tracks recent trades for corporate bonds.
Trace covers more than 4,200 bonds and gives you a history of trades, yields, prices and quantities for the same day. There is a five hour delay. Yet since most bond trades occur early in the morning, you can gain a good and useful sense of the day's market before trading closes at around 4:30 P.M. eastern time.
You wouldn't pay the list price at a flea market or a car dealership. Why should you in the bond market?
A retail price 1 or 2 points above a recent wholesale trade is acceptable on a $20,000 order for a corporate issue. For a $100,000 trade, the mark-up should be considerably smaller. (In bond parlance, a point represents $10 on a typical corporate with a $1,000 par value.) Accepting the broker's price is called "lifting the offering," which you do not have to do... Do not be afraid to haggle!
Here's how to search, step by step. After getting on to the BMA Web site, click on "corporate bond trade information." You'll see a chronological list of trades, as reported by brokers to the NASD. To buy a specific bond at the best price, first look at all the posted trades, pick out those familiar names with coupons, maturities, and credit quality that fit your investment profile.
A beautiful feature of Trace is that you can observe a bond's trading history for months back, which tells you how volatile the issue is and the difference between the price for smaller and larger trades.
This bond buyer's tool is truly a godsend!
* * * * *
There are ways around this problem of course. For instance, you can always restrict your purchases to new-issue bonds, where you pay the same price as a large mutual fund. But what if you insist on buying bonds in the secondary market? Then there are two facts that you had better bear in mind.
First of all, it is important for you to know in what capacity your broker is acting whenever you purchase bonds in the secondary market. It turns out that in any such transaction, your broker will either be acting as a principal, or as an agent. It is very important that you understand this because when your broker acts as principal, this means that the brokerage is participating in underwriting the issuance of the bonds in question, and in that capacity, the broker is not required to divulge the mark-up that he/she is adding to the price of the bonds... When the broker is acting as agent, this means that the brokerage must go out and purchase the bonds for your account, and in this instance the SEC requires that the brokerage must show the amount of mark-up on the Advice that accompanies your trade.
The second fact to bear in mind whenever you deal in the secondary bond market is that you can find out a lot of very valuable information just by logging on to the Bond Market Association's Web site, www.investinginbonds.com (which is included among our Links) and use the new and improved Trace system. Trace is an acronym for Trade Reporting and Compliance Engine, which mainly tracks recent trades for corporate bonds.
Trace covers more than 4,200 bonds and gives you a history of trades, yields, prices and quantities for the same day. There is a five hour delay. Yet since most bond trades occur early in the morning, you can gain a good and useful sense of the day's market before trading closes at around 4:30 P.M. eastern time.
You wouldn't pay the list price at a flea market or a car dealership. Why should you in the bond market?
A retail price 1 or 2 points above a recent wholesale trade is acceptable on a $20,000 order for a corporate issue. For a $100,000 trade, the mark-up should be considerably smaller. (In bond parlance, a point represents $10 on a typical corporate with a $1,000 par value.) Accepting the broker's price is called "lifting the offering," which you do not have to do... Do not be afraid to haggle!
Here's how to search, step by step. After getting on to the BMA Web site, click on "corporate bond trade information." You'll see a chronological list of trades, as reported by brokers to the NASD. To buy a specific bond at the best price, first look at all the posted trades, pick out those familiar names with coupons, maturities, and credit quality that fit your investment profile.
A beautiful feature of Trace is that you can observe a bond's trading history for months back, which tells you how volatile the issue is and the difference between the price for smaller and larger trades.
This bond buyer's tool is truly a godsend!
* * * * *
posted by Bob Moser at
6:34 PM
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