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new Schwab bond pricing
Old 07-02-2007, 03:47 PM   #1
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new Schwab bond pricing

Thought folks might be interested to know that Schwab
has reduced their markups on bond purchases. Treasuries
now have no markup, even on the secondary market ("at
auction" purchases were already free). Other secondary
trades are now $1/bond ($10 min, $250 max). This is all
for on-line trades.

I guess the real reason I'm posting this is to ask other Schwab
folks here, who may be be smarter (more cynical) than me, if
this is as great as it looks ?

I'd love to get some more TIPS, what with the YTMs pretty good now.
Speaking of which, is YTM (and maturity date) the only number that
really matters ? Bloomberg currently shows the same YTM on a
2% 5-yr and 2.375% 10-year TIPS, the former trading at 97/100
and the latter at 98/100. Clearly the "current yield" on the 5-yr is
a lot lower, but the growth on the principal is a lot better (in other
words, your principal grows 100/97 in 5 years, instead of 100/98 in
10 years). So they seem to balance out to the same YTM, which
is all that matters, no ?
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Old 07-02-2007, 04:10 PM   #2
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Other with more fido experience can comment, but as I understand it this basically puts Schwab at about the same pricing as fido on bonds, which is a good thing. We will find out how good they are teh next time the junk market goes floppy and I try to buy some bonds.
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Old 07-02-2007, 05:27 PM   #3
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Actually Schwab is a bit cheaper than Fido now $10 min vs $20
Free for secondary government issues vs .50 at Fido. Corporates $1 Schwab $2 FIDO.

The other thing I like is being able to see the actual bond mark up.
Of course by the time I log on today the bond market was closed so I didn't notice anything different
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Old 07-03-2007, 10:53 AM   #4
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I buy and sell around $10M of bonds a week at Schwab for clients so I guess I would qualify as a "heavy user" of their FI services.

I am of the opinion that transparency is always a good thing.
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Old 07-03-2007, 11:15 AM   #5
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Quote:
Originally Posted by JohnEyles View Post
I'd love to get some more TIPS, what with the YTMs pretty good now.
Speaking of which, is YTM (and maturity date) the only number that
really matters ? Bloomberg currently shows the same YTM on a
2% 5-yr and 2.375% 10-year TIPS, the former trading at 97/100
and the latter at 98/100. Clearly the "current yield" on the 5-yr is
a lot lower, but the growth on the principal is a lot better (in other
words, your principal grows 100/97 in 5 years, instead of 100/98 in
10 years). So they seem to balance out to the same YTM, which
is all that matters, no ?
The YTM is the key number to focus on. It is a pretty good estimator of what the coupon will be on a newly-issued (as opposed to a re-open) TIPS. Bloomberg uses market prices for the latest-issued TIPS, which is why the prices are not 100. Next week (July 12) a new 10-year TIPS will be auctioned. Although the actual coupon will be determined at the auction, it looks like (as of now) it will be 2.625%, which is higher than we have had recently.

I am tempted to buy some TIPS at next week's auction, however I am still tempted by ISM/OSM (since they are less than 1% of my portfolio). At current prices, the real returns on ISM/OSM are over 5%. Looks like the coupon yield is about equal to that of a 10-year TIPS, but there is a built-in accretion of about 2.75% per year (higher than the current inflation forecast). Plus, you get about 1.3 x year-over-year inflation added to the current real yield.

Yesterday, Fitch cut their ratings on SLM's long-term debt, to BBB with an indication they will probably cut it again to BB+, which is the highest non-investment grade (junk) rating.

Fitch rating for SLM

At these levels ISM/OSM are offering nearly equity-type real returns. It seems to me the real risk is outright default, and if that happens, the bondholders will own the company (for whatever it's worth).

Any thoughts?
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Old 07-03-2007, 01:29 PM   #6
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Originally Posted by FIRE'd@51 View Post
Any thoughts?
It is actually a matter of attitude more than fact. My attitude is that I want equity type returns for equity level risks. IMO this situation does not offer the returns, just the risks.

Ha
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Old 07-03-2007, 04:12 PM   #7
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I agree with Ha. I can buy an equity fund/etf and my chances of full long term default are darn near zero.

I'm not sure what the heck could happen to my principal in ISM/OSM. Pretty sure nobody else does either.
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Old 07-03-2007, 05:34 PM   #8
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FIRE you can have all the of the OSM or ISM you want at special board member discount price of $20. First come first serve.

The cool thing is OSM/ISM are not like your basic boring buyem and forget em government bond, or CD. They come with the add benefit of being able to involved in a merger, governmental hearings, and the hotest new thing in finance private equity funds. Its not just an investment with a great yield and almost guarranteed opportunity for a 25% capital gains in the future, but a chance to make new friends and learn new things.

(Can you tell I was in marketing )
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Old 07-03-2007, 05:44 PM   #9
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FIRE you can have all the of the OSM or ISM you want at special board member discount price of $20. First come first serve.
No thanks, I can get as much as I want in the marketplace for about $19 (or less).
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Old 07-03-2007, 05:46 PM   #10
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Surely given all that excitement, you should be able to get $22 a share.

All y'all better run and scrounge up all that free float quick before the price goes up.
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Old 07-03-2007, 06:38 PM   #11
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Fire this is a bit of inside joke, before buying ISM/OSM shortly before the talkover (talk about horrible timing) CFB offered to sell me some of his. Of course needless to say the price he was offering was always above the market price.
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Old 07-03-2007, 08:09 PM   #12
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needless to say the price he was offering was always above the market price.

You say that like its a bad thing!
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