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Author: charliebonds Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: Bond Prices for Small Investors? Date: 11/30/2011 2:54 PM
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Nearly all advice offered in this forum to beginning investors about buying individual bonds is merely a repeat of what someone else said to them instead of being the product of actual experience and/or testing. So let’s dig into one of those much-repeated “conventional wisdoms” that goes something like this. “The small investor is at a huge disadvantage pricewise compared to the institutionals and cannot compete effectively with them.”

That statement might seem to be true. Whether it’s stocks or bonds (or anything else), size does matter in the sense that a volume purchase can typically command a discount on price that a retail-sized quantity won’t receive. Therefore, an investor buying a small quantity of bonds might expect to pay a higher price than someone buying in round lots or larger. But it can sometimes be the case, especially if the issue is liquid and the trade is done properly, that the small bond investor can walk away with a very competitive price for her or himself. Below is T&S for one of the bond purchases I did yesterday, Nov 29. The issuer doesn’t matter. What matters is that the issuer was liquid, the book was deep, and I used a bond broker that doesn’t gouge its customers.

SIZE PRICE YTM AS FLAGGED BY THE EXCHANGES
10 88.540 7.163 Customer Buy
10 88.056 7.239 Customer Buy
10 87.999 7.248 Customer Buy
45 87.800 7.280 Customer Buy
20 87.800 7.280 Customer Buy
15 87.750 7.288 Customer Buy
25 87.750 7.288 Customer Buy
10 87.750 7.288 Customer Buy
30 87.696 7.296 Customer Buy
35 87.550 7.319 Customer Buy
50 87.520 7.324 Customer Buy
20 87.500 7.327 Customer Buy
250 87.500 7.327 Customer Buy
10 87.500 7.327 Customer Buy
33 87.500 7.327 Customer Buy
10 87.424 7.339 Customer Buy
15 87.415 7.341 Customer Buy
40 87.371 7.348 Customer Buy
15 87.295 7.360 Customer Buy
30 87.232 7.370 Customer Buy
30 87.200 7.375 Customer Buy
15 87.186 7.377 Customer Buy
10 87.115 7.389 Customer Buy
25 87.109 7.389 Customer Buy
60 87.077 7.395 Customer Buy
9 87.058 7.398 Customer Buy
5 87.046 7.400 Customer Buy
10 87.034 7.401 Customer Buy
30 87.034 7.401 Customer Buy
118 87.034 7.401 Customer Buy
30 87.034 7.401 Customer Buy
50 87.029 7.402 Customer Buy
7 87.000 7.407 Customer Buy
7 87.000 7.407 Customer Buy
20 87.000 7.407 Customer Buy
5 86.967 7.412 Customer Buy
33 86.957 7.414 Customer Buy
50 86.928 7.418 Customer Buy
35 86.907 7.422 Customer Buy
3 86.902 7.423 Customer Buy
5 86.902 7.423 Customer Buy
50 86.900 7.423 Customer Buy
25 86.900 7.423 Customer Buy
100 86.897 7.423 Customer Buy
50 86.896 7.424 Customer Buy
15 86.893 7.424 Customer Buy
32 86.882 7.426 Customer Buy
25 86.875 7.427 Customer Buy
25 86.857 7.430 Customer Buy
25 86.836 7.433 Customer Buy
25 86.815 7.437 Customer Buy
90 86.805 7.438 Customer Buy
21 86.797 7.439 Customer Buy
50 86.760 7.445 Customer Buy
20 86.753 7.447 Customer Buy
50 86.750 7.447 Customer Buy
50 86.750 7.447 Customer Buy
100 86.750 7.447 Customer Buy
58 86.718 7.452 Customer Buy
25 86.716 7.452 Customer Buy
270 86.690 7.457 Customer Buy
10 86.537 7.481 Customer Buy
15 86.424 7.500 Customer Buy (Price includes commission)
10 86.365 7.509 Customer Buy
10 86.190 7.537 Customer Buy
2 86.058 7.559 Customer Buy
500 85.930 7.580 Customer Buy (Trades outside of market hours)
10 85.850 7.593 Customer Buy (Price includes commission)
25 85.783 7.603 Customer Buy
1 85.753 7.608 Customer Buy (Price includes commission)
5 85.722 7.613 Customer Buy (Price includes commission)
7 85.714 7.615 Customer Buy
6 85.713 7.615 Customer Buy
10 85.672 7.622 Customer Buy (Price includes commission)
10 85.658 7.624 Customer Buy
5 85.602 7.633 Customer Buy (Price includes commission)
5 85.591 7.635 Customer Buy (Price includes commission)
150 85.516 7.647 Customer Buy
10 85.502 7.649 Customer Buy (Price includes commission)
25 85.491 7.651 Customer Buy
10 85.491 7.651 Customer Buy (Price includes commission)
5,000 85.486 7.652 Customer Buy
1,330 85.467 7.655 Customer Buy
575 85.467 7.655 Customer Buy (Trades outside of market hours)
575 85.382 7.669 Customer Buy
-------------------------------------------------------------
10 85.353 7.674 Theoretical (@$1/bond commish & 10-min buy)


What’s the spread between the worst price paid (and, therefore, the worst yield obtained) and the lowest price (and, therefore, the highest yield obtained)? Which trade was mine?

The lowest yield went to whomever bought 10 at 88.540 and who probably did the trade through Vanguard, Schwab, Scottrade or AmeriTrade, all of whom gouge their customers with high commissions and/or mark-ups. Clearly, that purchase was done by someone who didn’t know what they were doing (and/or was very price-insensitive. LOL).

The best yield was obtained by whomever bought 575 bonds at 85.353. Clearly, that trade was done by an institutional, as were the next several up on the list. But the sixth from the bottom was a buy of 10 at 85.491. The eighth from the bottom was another buy of 10 but done at 85.502. Clearly, both were small investors who knew what they were doing and who probably executed through one of these four brokers:

E*Trade ($1/bond, $10 min/ticket)
Zions Direct (flat rate of $10.95/ticket)
Fidelity ($1/bond, $8 min/ticket, but, also, a crappy search engine and very inferior inventory)
Interactive Brokers ($1/bond, $5 min/ticket, but, also, a crappy search engine and lesser inventory than ET or ZD)

And, “No”, either were my trade. Mine was the single further up in the list at 85.753. But had I gone 10, the theoretical best for the day would have been my actual, all-in price and yield, because I had lifted the offer at 85.253. By doing a single, I gave up about 7 bps of yield (after commish), a price I was more than willing to pay to keep my exposure to this issuer small. But look over that list again. How did several, small investors do on price compared to how the big boys did on price? Not a whole lot of difference, right? A cost-increase of a mere 6-7 bps of yield compared to the best of the institutionals, but a savings of nearly 50 bps of yield compared to the idiot who bought in at 88.540.

If you want to be taken advantage of on price and/or commission, you can certainly find ways to do so. Just set up your account at Vanguard, Schwab, Scottrade, or AmeriTrade and buy your bonds through them. OTOH, if you want to shop for bonds the way you presumably shop for bell peppers or broccoli, you can do that, too. Just find a decent bond broker and do your buying there.

Charlie
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