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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 35344  
Subject: Re: Bond Sreads & a Marconi Warning Date: 8/19/2001 1:28 AM
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Dan,

I did check multiple sources for quotes before I bought and found that the trading spread - aka, the range between the bid and the offer - at four firms was about two points, which is fairly typical. My surprise was the huge gap between what I paid and what I was told the next day the bond were now considered to be worth, aka, their marked-to-market value, which I realize is often a calculated value [from matrix pricing] rather than a report of actual closing prices, because, as you say, the bonds are thinly traded and the firms don't have any in inventory.

I'm seeing that sort of discrepency on my Inland Steel bonds. One day they are marked to market at 68 , the next at 78, and then back to 68, yo-yo, fashion, huge moves that likely have nothing to do with how the bonds were traded that day but more to do with backoffice, automated pricing schemes. Whereas an actively traded issue like Tommy Hilfinger moves every day by quarters and halves and its mark-to-market value is easy to confirm from a lot of sources.

It wouldn't surprize me if the market makers for Marconi bonds were artificially supporting the price, which I've seen happen with Sterling Chemical's bonds, where I could find from other sources reported trades at 6 points under E*Trade's current offer, but I couldn't get a fill from them unless I was willing to buy at the offer, and my concern was to warn potential buyers of Marconi bonds - wherever they are trading - that rather than bid anywhere close to the offer, they ought to knock eight to ten points off and try for that price instead and obtain for themselves a better price than I seem to have ended up with.

Sometimes I win the pricing war and by the end of the day I'm in the money on an new position from where I bought, even after deducting commisions. Other times, I take a beating for a couple of weeks or even months until the company or market turns around as I was anticipating. I buy with the expectation that the company will be filling Chapter 11 sooner or later and that my loss rate is going to be about what the five-year historical default rate is for triple CCC's, or ~5-8%. Not a problem. If this stuff were easy and safe, there'd also be no money in it.

Thanks for your input.

Charlie
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