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Bonds in the secondary market
Old 03-02-2011, 06:24 AM   #1
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Bonds in the secondary market

What are your thoughts regarding buying bonds in the secondary market

I just did a quick search and found some appealing rates and also notice that the higher quality were selling at higher value than par but is still left a juicy rate. The below is just one sample. The duration is some what long but the yield is a lot higher than what my expected withdrawal is going to be!!!

10
1
706451BD2
Pemex Proj Fdg Master Tr Conditional Calls
9.5
09/15/2027
129
6.592
Baa1/ BBB
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Old 03-02-2011, 09:49 AM   #2
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When I go to your link I get a log-in page that needs a user ID and password--any information available about this bond some other place?
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Old 03-02-2011, 12:52 PM   #3
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What are your thoughts regarding buying bonds in the secondary market

I just did a quick search and found some appealing rates and also notice that the higher quality were selling at higher value than par but is still left a juicy rate. The below is just one sample. The duration is some what long but the yield is a lot higher than what my expected withdrawal is going to be!!!
I think I would not be buying individual bonds on any market, primary or secondary, if I got my information from an internet chat board.

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Old 03-02-2011, 01:04 PM   #4
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Buying bonds on the secondary market is fine, as long as you know what you're buying, and don't expect to trade in and out without getting fleeced.

But with respect to the 1st point, I'd want to know what's going on with Mexican Sovereign risk, what's going on with PEMEX operationally, and I'd want to have a very good understanding of what the "conditional call" on a 9.5% coupon bond trading at $129 is all about. If I couldn't answer each of those questions in detail, I'd pass on this "opportunity."

Edit: Oh, boy. Is this even PEMEX risk or is the obligor some kind of special purpose financing vehicle? I have no idea what "PEMEX Proj Fdg Master Tr" is, but if this is a project bond I'd say stay clear. It may be a perfectly good credit, but I don't think it's possible for an individual to gather the right information to know. So I'd add "Who am I lending to?" to the list of questions above.
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Old 03-02-2011, 04:39 PM   #5
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The Pemex bond was meant has just one example of what is available in the secondary market. The idea is to buy a bond and just hold to maturity since the yield is much higher than the expected withdrawal amount.
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Old 03-02-2011, 04:53 PM   #6
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The Pemex bond was meant has just one example of what is available in the secondary market. The idea is to buy a bond and just hold to maturity since the yield is much higher than the expected withdrawal amount.
As long as you are happy, I am happy. Just be sure to keep us posted, because we all like to learn from others' experiences.

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Old 03-02-2011, 04:56 PM   #7
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The Pemex bond was meant has just one example of what is available in the secondary market. The idea is to buy a bond and just hold to maturity since the yield is much higher than the expected withdrawal amount.
HF63, this bond aside, are you equipped to really buy individual bonds? Can you do deep dive credit work to really understand whether the issuer will keep paying? How much experience do you have reading 10Ks and 10Qs and building cash flow generation models on individual companies? If all of this does not sound familiar, I would encourage you to stay away from individual bonds.
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Old 03-02-2011, 05:38 PM   #8
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I would only feel confident buying Treasuries for a ladder (as bullets to eventually spend).... likely new issues.

Corporate stuff.... I intend to stick with mutual funds.
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Old 03-02-2011, 08:37 PM   #9
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The Pemex bond was meant has just one example of what is available in the secondary market. The idea is to buy a bond and just hold to maturity since the yield is much higher than the expected withdrawal amount.
Yes, but a similar series of questions could be asked of any bond you choose. Brewer articulated directly and more clearly the point I was trying to make.

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HF63, this bond aside, are you equipped to really buy individual bonds? Can you do deep dive credit work to really understand whether the issuer will keep paying? How much experience do you have reading 10Ks and 10Qs and building cash flow generation models on individual companies? If all of this does not sound familiar, I would encourage you to stay away from individual bonds.
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Old 03-02-2011, 08:57 PM   #10
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Assuming markets price things rationally, a bond paying 3x what a "risk less" bond is paying should be about three times more risky or volatile. But that is just part of the story. In addition to risk of default you will also likely pay a price for diminished market penetration. If it is not as popular in terms of volume or number of buyers and sellers, you will also pay an increased bid ask spread.

Hopefully this one bond holding would constitute less than 1% of your net worth as well.
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Old 03-03-2011, 12:00 AM   #11
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(snip)Hopefully this one bond holding would constitute less than 1% of your net worth as well.
I recently did some reading about investing in individual bonds. It takes a considerable amount of money to create an adequately diversified portfolio of individual bonds. Using the above rule of thumb, the OP should have at least 6 figures for that purpose.
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Old 03-03-2011, 06:05 AM   #12
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I recently did some reading about investing in individual bonds. It takes a considerable amount of money to create an adequately diversified portfolio of individual bonds. Using the above rule of thumb, the OP should have at least 6 figures for that purpose.
I can't give the source but once read as a rule of thumb people could not afford to be into individual stock unless they had 50k invested. Usually then experts claim you need like 6-12 different sector stocks to be diversified.

Bonds lately seem to be sold in 1-5k minimums by my brokers. If the same logic held for bonds that they do for stock about diversification you would need say 9 bonds at 5k to have any real diversification.

Why I think each bond must be an even tinier % of the holdings is a bond loss lately has been more catastrophic than in the past. Bankruptcy judges no longer seem to honor bond holder's rights second only to taxes and salaries.

GM bondholders rights were subjugated almost to that of unsecured debtors in favor of employees I am told to keep the company open at all costs by the government. Seems the bonds are worth like 10 cents on the dollar now, while employees are receiving a bonus...

Bonds/fixed income are about 1/3 of our holding. I hold more secure bonds but more stock to balance out the risk reward potentials that I would have with more corporate or third world bonds.
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Old 03-03-2011, 10:37 AM   #13
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(snip)
Hopefully this one bond holding would constitute less than 1% of your net worth as well.
I recently did some reading about investing in individual bonds. It takes a considerable amount of money to create an adequately diversified portfolio of individual bonds. Using the above rule of thumb, the OP should have at least 6 figures for that purpose.
I can't give the source but once read as a rule of thumb people could not afford to be into individual stock unless they had 50k invested. Usually then experts claim you need like 6-12 different sector stocks to be diversified.
From my recent reading, a rule of thumb specifically for bond investors: The Only Guide to a Winning Bond Strategy You'll Ever Need says a bond allocation of at least half a million dollars is required for adequate diversification when investing in individual corporate bonds. That right there gave me my answer to the question "should I invest in individual corporate bonds?"

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Bonds lately seem to be sold in 1-5k minimums by my brokers. If the same logic held for bonds that they do for stock about diversification you would need say 9 bonds at 5k to have any real diversification.
I use Scottrade. Their bond minimum is $5K. Before last summer it was $10K

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Why I think each bond must be an even tinier % of the holdings is a bond loss lately has been more catastrophic than in the past. Bankruptcy judges no longer seem to honor bond holder's rights second only to taxes and salaries.

GM bondholders rights were subjugated almost to that of unsecured debtors in favor of employees I am told to keep the company open at all costs by the government.(snip)
My other recent read on the topic is Bonds Now, by Marilyn Cohen & Chris Walburg. IIRC this is the only bond book in the library that was written after the recent market crash & bailouts. The authors refer to the very issue you are talking about here, inappropriate subjugation of bondholders in bankruptcy of the issuer, as one of the risks faced when investing in "bonds now" (as contrasted to investing in years past). That, plus the description of how the investor negotiates for better prices when buying bonds, convinced me that individual bond investing, other than Treasuries, TIPs, and/or Savings Bonds, is not for me, even if I did have enough money for adequate diversification. Your mileage, or OP's, may vary.
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Old 03-03-2011, 04:20 PM   #14
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You might check if there are different limits for a bond purchase in an IRA account compared to a non deferred account. One brokerage has a 5k minimum in regular account and 1k in an Ira account.

Regarding starting a bond account or a bond ladder of some form I started ours with a mixture of Cd's, treasuries, one or two agency bonds, and zero coupon Cd's, and zero coupon bonds when we got an unexpected windfall. It was not 500k initially though. I filled in the ladder with mostly zero coupon bonds and as they are maturing I am replacing they with regular bonds paying out interest semiannually.

Some experts suggest only going out 7-10 years with fixed income but I am self creating an annuity so am going out further than the experts suggest opening up more inflation risk with those assets.
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