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Subject:  Re: Buying Bonds Date:  12/21/2006  10:00 PM
Author:  imdajunkman Number:  19105 of 36321

Where Do I Buy Corporate Bonds?

• Corporate bonds can be bought via bond desks or on-line through brokerages, typically for a slightly higher commission than for Treasuries, although there are now many discount brokerages that offer the same rate on all or most bonds.
--- Vanguard's commission on corporate bonds is $25 plus $2 per $1000 bond.

• Bonds are not sold through big, central, markets, like stocks, so you need to rely on the inventory available at your broker.
---Some people who would never use a full-service broker for stocks prefer one for bonds, because of larger inventories.
---Others use multiple brokerage accounts, in order to have a larger combined inventory and to choose whoever has the best deal for the same bond.

• Beware of mark-up costs (the difference between the price listed for a bond and what you actually pay for it), which vary considerably between brokerages and might more than make up for differences between commissions.


The preceding was offered to you as an answer to your question by someone who doesn't buy his own corporate bonds and who knows very little about the corporate bond market that is of any use to bond beginners. If you want useful information, then you need to search out useful sources, which you attempted to do by asking your question, but to which no one yet has given a proper answer, which is NOT to claim that any of the following is useful or trustworthy. But it was at least written by someone who does buy his own corporate bonds (and munis, agencies, and treasuries, but not ABS's.) So the information at least has the authenticity of first-hand experience.

You can buy corporate bonds the exact same way you can buy bell peppers. To buy peppers, you can go directly to the farmer and buy from him, or you buy from a middleman whose place of business can be as informal as a roadside vegetable stand or as elaborate as a conventional grocery store. Not many issuers of corporate debt sell directly to the public. But there are some, and you can find them by doing some searching. However, most people buy their bonds through a securities broker (“a bond store”), which might be a “discounter”, a mid-priced dealer, or a “full-service” broker (who generally won't be any more expensive than the discounters). So where you buy your bonds -- what store you buy them from-- won't much matter as far as price.

However, some brokers are definitely cheaper than others, with Interactive Brokers –-and their $1/bond commissions-- probably being the cheapest. The downside of using IB is that they don't quote the whole corporate market. But, then, no one does. All of them quote only a fraction of it, with some quoting a larger fraction than others. E.g., Fidelity brags that they quote 7,000 bonds. E*Trade claims to quote 18,000. Not all of that 18,000 are corporates, but I know for a fact that that Fidelity's inventory –-the bonds they hold in house or that they can access through though their network of dealers— is smaller than E*Trade's. And Scottrade's bond inventory is even smaller than Fidelity's.

An aside: Why do inventories vary? Liquidity. Just because umpteen million dollars of the bond are known to be outstanding doesn't mean that there is anyone who is willing to sell you some of them. (The smart money sits on the good stuff and sells their trash.) Also, the price at which you will be able to buy your peppers –-your bonds-- will depend on supply and demand factors (such as the growing season) and the quantity you wish to buy, as well as the sort of relationship you cultivate with the seller. If you buy many cases of peppers through the year, year after year, you can obtain the best prices. The same is true with bonds and with any market transaction. If you're a tiny player and you don't know the market, you'll typically pay the most adverse prices, which typically have three components: a spread, a markup on top of the spread, and a commission.

A spread is simply the difference between the asking price (“the ask” or “offer”) and the selling price (“the bid”). The combination of the best ASK (the lowest asking price) and the best BID (the highest price at which a buyer would be willing to buy your bonds) creates “the inside market”. Although it is true that there is no national exchange where corporate bonds are sold the way there certainly are exchanges where stocks are sold, there is a national quoting system whereby it is generally possibly to find out what the inside market is for any corporate bond, as well as Time & Sales for those bonds (which is yet more terminology you'll need to look up.) Once you know what the inside market is for a particular bond (which includes information as to both Price and “Size”, then it is easy to determine whether your broker is “marking up”, which most brokers do. If you want a bond and they don't have it in their inventory (or can't do a “crossing trade”, which is another term you'll need to look up), then they go into the secondary market, buy the bonds at the best price they can and then re-price the bonds slightly higher (and, possibly, apply a commission as well) and then sell them to you.

Markups happen in several ways. Any new-issue bond has a built-in markup, which is the underwriter's profits (and how that happens is a fascinating story you'll need to look up). Markups also happen in the secondary market, as the previous discussion explained.

Commissions vary all over the map from $1 per bond with a $5 minimum per trade to a couple of bucks per bond with a $25-50 minimum. There are two basic viewpoints on commissions. One viewpoint argues that other factors (such as good executions, good customer service, and access to research and/or hand-holding) far outweigh the differences in total commission costs between one broker and another. Another viewpoint argues that costs are the reciprocal of gains and have to be minimized and that costs for investors won't come down unless investors vote with their feet by moving accounts to brokers who offer them the lowest total costs.

NB: Some brokers will make the deceptive claim that they charge no commission for selling you bonds(which is equivalent to the lie they tell about FOREX trades being "commission-free". No brkoer does trades for free. They meet their costs and make their profits from the spread and/or a markup and/or a commmission and/or "order flow" (which is yet more terminology that needs looking up), or from all four at the same time. The only thing that varies from one broker to another are the labels and the disclosures. Some are upfront about costs. Others disguise them.

Now, here's where rubber meets the road. If you want to buy a bell pepper or two for a salad or stir-fried vegetables, you don't make much of a research effort. In fact, if you're in a hurry, you'll buy your peppers wherever is most convenient, at whatever price they are asking. You might not ever go back to that store if their prices are significantly higher than you customarily pay and their quality isn't significantly better. But the transaction is no biggie. You do it, and you move on. Bonds, OTOH, typically cost about $1,000 a piece and typically require a 5-10 bond minimum purchase. If they are letting you buy fewer, it's because they want to dump inventory, which sometimes creates pricing opportunities, because “odd lots” (which is yet more terminology that needs looking up) are often attractively discounted. But let's say that you do want 5-10 bonds, so you're talking about an amount of money for which it is worthwhile to spend some time shopping around. Fidelity –-to their credit, and there are other sources-- enables people who don't have an account with them to price bonds during normal market hours. (If you poke around their website, you'll find the right page.) Your next step would be to call your normal broker and ask him (or her) to quote you the bond. If the price is cheaper and that's where you customarily do your investing/trading, then do the trade and don't look back. The big money in bonds doesn't come from shaving nickels. It comes from getting the timing mostly right. In other words, there are smart times to buy bonds, and there are dumb times to buy bonds. Knowing which is which is a lot more important than worrying about spreads, markups, and commissions or which broker you deal with. But, yes, call or visit the websites of the major, online, bond brokers (which would be Fido, Schwab, Scottrade, E*Trade, AmeriTrade, and IB), as well as a couple of the full-service brokers. Ask them about minimum account size, account fees, commissions, markups, inventories, etc., but also look at the total picture. How many corporates are you going to be buying over how many years? Will doing business with one broker rather than another really offer any significant advantages? Lastly, and most importantly, you need to answer for yourself this question: Is now really the time to be going shopping for bonds or to be putting significant, new money to work in the asset class? Most definitely, stick a toe in the water, launch an investment or two, and learn all you can. But be very cautious about putting much new money to work, because right now the bond market is “tight”. If your timing is wrong, it's going to be expensive to unwind your mistakes. And my crystal ball isn't any better than anyone else's. But I do know, from being an experienced bond shopper, that right now yields are puny and real rates of return (after expenses, taxes and inflation) are tough to find.


PS I use E*Trade and IB for my corporates. But Fido is finally getting serious about being a player in the online bond broker market, and I'd set up an account with them if I saw the need to do so, just as I'd do whatever I had to to accomplish my investment goals.
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