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Author: imcharliehm Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: Bond Sreads & a Marconi Warning Date: 8/18/2001 2:02 PM
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It's no secret that trading spreads for bonds are atrociously wide compared to stock bid and ask spreads, and, therefore, there is going to be a difference between the price at which you bought your bonds today and the price at which they are likely to be marked to market when the brokerage firm posts the trade the next morning.

For high-grade issues that are widely traded this valuation spread might be only a half point or so. For junk issues, especially those with depressed prices, the difference between the trading offer and the price at which the bond will be marked to market if you buy it runs as much as 5 or 6 points, from my limited experience. I don't like it, but that's the junk market and you either learn to deal with it or you trade something else.

But I've never seen a 10+ point spread until this morning when I bought some Marconi 7.75's of '10 at 80.903 at Schwab yesterday and see they are marked to market at 70 something today. This was the first time I've used Schwab, so I don't know whether they are merely very conservative about how they value a customer's bonds, or whether the the valuation spread is really that wide. At E*Trade I can generally verify their valuations by pulling closing quotes from HyMarket (a junk bond boutique.) 95% of the time the two figure agree, which also makes it easy to know in advance where to set my limit orders when I'm trying to buy something. Sometimes I can get a fill. Other times E*Trade tells me that "my price is too far from the market" and I just pass on the issue rather than chase the price.

HyMarket didn't have a quote for Marconi, but other firms had the following offers:

E*Trade 82.512
Waterhouse 82.820
CSFB 82.075
Schwab 80.903

I know Marconi is in trouble, as are all of the telecos, others of whose bonds I also own, that the stock has crashed badly, and that S&P and Moody's both have put the company on negative credit watch, etc., so I thought I was going into the situation reasonably well forewarned, but I seem to have guessed wrong.

Whether the issue is appropriate for your own portfolio is something each investor has to decide for him/herself, but if you are interested in buying the issue, don't hesitate to use a very, very aggressive limit order in an attempt to cut the spread as much as possible. You might not get a fill, but that might also be a good thing. (I'm always worried when I bid close to the bid but still get a fill.)

Charlie


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