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URL:  http://boards.fool.com/running-a-basic-bond-scan-30454610.aspx

Subject:  Running a Basic Bond Scan Date:  12/28/2012  11:53 AM
Author:  globalist2013 Number:  34582 of 35650

With Congress dithering over matters that will affect all investors hugely, and with only two more market days remaining in 2012, I’m not likely to do any buying today. But that doesn’t mean I’m not shopping. I shop every day --meaning, I look for buying opportunities every day-- because that’s what a bond investor does. In a timely and consistent, persistent manner, he/she looks to see what is being offered. The easiest way to get a fast look at where bond prices are is to run a scan. So let’s set up and run a very simple one.

Open up your brokerage account and ask to be shown all bonds of any rating or maturity offering a YTM of 5% of better, and ask that the list be sorted first by issuer and then by maturity. If you’re using a broker who quotes the whole of the corporate market, then you’ll be returned just two pages, or less than 1,000 bonds, which is a reasonable number to look at. Then scroll through the list, top to bottom (or bottom to top). If you ran this same scan yesterday (and the day before and the day before that), you’ll recall seeing many of the same names and similar prices, and pricing anomalies will become easy to spot or, maybe, an issuer or maturity will show up that wasn’t there before. Jot down those names, and then continue scrolling through the list, A to Z (or Z to A, just to break up your routine). Probably you’ll end up with just five or six names, which isn’t an overwhelming number to research further.

But let’s say that you laid off your scanning for a couple of days and that you want review afresh the whole list. The first name that should have caught your attention is AK Steel’s 7-5/8’s of ’20, with its 10.019% yield. Never mind its single-B rating. 10% for a nearby bond is a lot of money in this interest-rate environment. So much so, the YTM is a clear sign that traders/investors are worried about the prospects for AKS, which is A Good Thing. If there’s nothing wrong with a potential investment, then you don’t want it. You don’t get paid for buying what is ‘safe’. You get paid for accepting ‘risk’ (i.e., for buying 'risk' at a sufficient discount to its 'fair market value' to create for yourself a 'margin of safety'). Your job as an investor (in any asset-class) becomes that of figuring out:

(1) whether the traders’ worries are ‘justified’
(2) if the current price of the asset is ‘fair’
(3) whether you could manage the ‘risks’ if you put on a position

In short, your job as an investor is to estimate the odds that the bookies have set the odds correctly and then decide whether or not to fade them.

The fastest way to answer those questions is to work through them backwards. If the minimum-purchase is bigger than would be prudent for your account, and if there’s isn’t a ‘back door’ to a smaller-sized position by paying up in the book, then you can’t do the trade, no matter whether you want to or should. You can’t afford to accept the risks even if you haven’t yet even begun to quantify them. Putting on a position would be beyond your means. That doesn’t mean that tomorrow’s market might not bring a more favorable minimum-purchase (and/or a more favorable price as well). But you can’t do that particular trade today. So m