I have been watching a particular issue and drooling for some time, specifically the NNA 8.625%of '17 first mortgage bonds. I own a bunch of the equity, understand the issuer, market and ultimate parent well. I watched the bonds drift down to the low 80s and trade a couple weeks there. Low 80s is where I start getting interested (~12% YTM), especially since the mortgaged fleet is worth high 70s (bond coverage) and with the charters that are in place the bonds are covered at something like 200% at current prices. Yet every time I tried getting an ask at Schwab I got 89 or 90 asks. For whatever reason, I fnally saw an ask of 82.50 for up to 25 bonds yesterday and I umped on a chunk.The most annoying thing is that while I was being offered these bonds at 89-90, I saw a number of institutional buys in the low 80s.The deck is really stacked against the retail bond buyer in the junk market. I am convinced that the 25 bonds ffered at 82.50 were probably some other poor retail investor getting skinned as they tried to sell.
Brewer, Stop whining, and congratulate yourself for your patience to be willing to wait for prices to come to you (rather than chase them). If you squeaked in at 82.600 (on an order for 10 executed at 12:59 on 09/13), you did good. The bond market --ALL all of the bond market, not just the junk market-- is an institutionally-dominated, 'old-boys' club in which the retail investor is a barely-tolerated nuisance. Commissions are abusive. Spreads are obscene. Historical data is hard to come by. Etc. Etc. Etc. But, also, so what? That's that game, and no one is required to play it. But them that do play it well, as you did with that trade, can profit quite nicely. Again, nice, nice, nice execution and a reaffirmation of the need to shop often enough to be current on prices, and often enough, as Scott has said, to be the one closest to the bargain bin when an opportunity happens. Charlie
The equity market used to be similarly unfriendly to retail, but the structure of the market changed for the better. Why shouldn't the bond market get cleaned up, too?
The equity market used to be similarly unfriendly to retail, but the structure of the market changed for the better. Why shouldn't the bond market get cleaned up, too? Compared to the bad old days, as recently as five years ago, things have improved greatly in the bond-market for retail investors.#1, Commissions have come down a lot. #2, Nowadays, any reputable bond broker will quote the inside-market to its clients, not a marked-up price plus a commish. #3, It's now possible to pull T&S for a year back. #4, The inventory now quoted is broader, due to brokers stitching together a wider network of underlying desks.But there will NEVER be a bond-market as favorable to small investors as the stock market has now become, due to its structure. The underlying bond desks will never relinquish their control of order-flow, because of the money they can make on the spread, which is typically a point and a half, and often wider. Were I a market-maker, I wouldn't relinquish that cash cow, either.
People said the same thing about the equity market years ago. Think big, baby.
People said the same thing about the equity market years ago. Think big, baby.The debt markets are way bigger than the equity markets. But the entrenched players really are entrenched. Also, the retail portion of bond trades is a small fraction of total volume compared to institutional trades. In his book, Cresenzi gives volume figures for the seven major segments (Mortgage-related, Corps, Treasuries, Money Market, Agencies, Munis and Asset-backed). Of them, the muni market is the only one in which individual investors play a significant role, holding about 75% of all outstanding issues. But the geezers sit on their bonds, never trading them, and volume for muni issues is so low as to be almost "by appointment only". No market maker is going to cut his profits by narrowing spreads, nor is any broker going to cut into profits by lowering commissions. Thus, major changes to how bonds are bought and sold (beyond the significant changes that have already occurred by moving online) will never happen in our lifetimes. Never. Never, Never. I'm sure of that. The game is what it is, and retail investors are a barely-tolerated nuisance to them that control it.
The bond market is corrupt and needs reform. I doubt it will get it.In the meantime, open up an account with Interactive Brokers, and enjoy their new bond feature that lets you set GTC limit orders on bonds. They transparently place your limit orders and multiple independent day limit orders on one or more electronic exchanges like Bond Desk. It's not my idea of a "market", but it sure beats taking your time each day to talk to uncooperative bond brokers.
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