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Selling bonds
Old 04-01-2010, 06:55 AM   #1
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Selling bonds

I purchased a large number of corporate and muni bonds during the downturn, they have all appreciated nicely and Iím thinking of selling them (fidelity retail account). I know itís harder to sell and am looking for any insights or advice on selling individual bonds.
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Old 04-01-2010, 08:17 AM   #2
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It's not that it is necessarily harder to sell corporate bonds, you just end up getting a bad price. Just make sure the price you're getting quoted is reasonable relative to where the market is. You can check bond trades here . . .

TRACE

And congrats on what I assume were some pretty good purchases.
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Old 04-01-2010, 09:22 AM   #3
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Greetings. I was a corp bond trader in my previous life so would offer a couple generic insights. First, there are two basic and parallel trading markets to the same corp (or muni) bond: The institutional market and the retail market. The round-lot institutional investment-grade (IG) market trades with a 5bp bid/ask and traders usually cut that down to 2-3bps for large trades north of 5mm. The institutional market may be over-the-counter but the market action due to the large Wall St. desks on the sell-side vs. the large asset managers, insurance guys, etc. on the buy-side gives it the feel and liquidity of exchange trading. A trader can typically push 2 buttons to get competing quotes and execute a trade within 15 seconds.

However, the retail market for corps is much less liquid and feels like what it is: over-the-counter trading. Even for common IG bonds I would see retail trades that were well off the institutional levels. This, though, is to be expected when you take the thought to the extreme: Since most bonds trade at $1000 par the liquidity for Pimco to trade 50mm WMT '14 vs you the retail dude trading 5k of the same bond will prob be off substantially. The back-office costs, broker costs, etc. for trading a bond does not increase or decrease proportional to the size of the trade in theory so $300 (cost example) for trading 5k of bonds vs. 50mm of a bond makes the ultimate price to the trader vary greatly for the same bond.

Trace data will then vary widely for the same bond. For you, it is prob best to get a feel for the price difference for your bonds between large trades and small trades that are close together - that difference will give you an idea of what price to expect for your retail trade vs the institutional price that you may see quoted or on Trace at the same time. The bond market moves second to second so looking at prices an hour apart will tell you very little about the reason for the actual price difference.

Finally, I suspect that you have to use Fidelity to execute your trades so prob worth looking into what their costs are vs other retail brokers. My sense was that Fidelity prob did fair execution for their retail accounts but I can not confirm that - Fidelity's execution of markets vs their total transactions costs are two different things as well.

Good luck.
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Old 04-01-2010, 10:52 AM   #4
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G4G - the prices were too good to pass up.
Gus, thanks for you reply. Yes, I Have to use Fido and am aware that they are the buyers.

I have been using this site to look at prices Corporate Market At-A-Glance and understand the markup will be a function of my volume and trading volume. Still, in the case the spread they ask is too high I was wondering if there is any way to nudge the bond desk to a more competitive price. The motivation to sell the corporates is tax - I'd rather have capital gain than interest. I suspect there's not a lot to be done - one of the challenges when dealing with individual bonds at a retail level - but it doesn't hurt to ask.
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Old 04-01-2010, 11:14 AM   #5
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Still, in the case the spread they ask is too high I was wondering if there is any way to nudge the bond desk to a more competitive price.
If you have a bond that TRACED at a much better level than what FIDO is bidding you can try calling your FIDO rep and say that you want the TRACE print. I don't know how much flexibility they have, but its worth a shot.

If it were a retail broker I'd certainly work them hard to get as close as possible to the institutional market. Particularly if it was a big liquid bond with a lot of trading volumes. With online brokers, though, it may be more of a take it or leave it kind of deal.

Good luck.
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Old 04-01-2010, 12:18 PM   #6
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Still, in the case the spread they ask is too high I was wondering if there is any way to nudge the bond desk to a more competitive price.
With any over-the-counter product that deals with the small retail market one of the fundamental problems that limits liquidity is that no Trader wants to hold a position long-term. Therefore, for odd-lots such as yours, any Trace print or other market quote will unfortunately be irrelevant to your trade execution - and there is no such thing as leverage to force a retail trader to take on a position for his Book as their only job is to make money while taking little risk. At the moment you request a bid the Trader who bids it will first get a sense for the market bid that he thinks he can re-sell it at immediately and then place an additional vig to cover the possibility that he won't actually get that bid, also some more to pay for the broker's cut, more to cover Fidelity's back-office cost, etc...imo your goal when selling individual bonds will be to get a fair price but this price will prob have little to do with the fair institutional spread that you may be seeing at that time.

I don't know what your bonds are nor what the market conditions will be when u try to sell but those are my general thoughts and opinions.
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Old 04-01-2010, 01:22 PM   #7
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Therefore, for odd-lots such as yours, any Trace print or other market quote will unfortunately be irrelevant to your trade execution - and there is no such thing as leverage to force a retail trader to take on a position for his Book as their only job is to make money while taking little risk.
That's true only to the extent that the original bid is fair to begin with. As you know, "fair" depends on a lot of things. One of which is the trader's sense of how much he can get away with. It's entirely possible the bad price is a function of a trader trying to rip the face off of a retail investor. If that is the case, he may very well be willing to make a better market.
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Old 04-01-2010, 05:27 PM   #8
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Lots of good comments thus far. I have sold a number of retail lots in the last year through Schwab. Spreads have gone from 3 or more points (to TRACE/ask) to around 1 now as liquidity has improved (I just sold a 10k lot of bonds for 1 point less than the ask shown on Schwab's website). All you can do is try to avoid being badly beaten. Watch TRACE and try to find the same bonds on your broker's website to see what their ask is for a similar sized lot. That way you at least know about what the spread is so you can decide whether you are willing to take the hit to sell. Also be patient. Sometimes nobody wants to trade your retail lot, so the quotes are low. Wait a day or two and come back if that is the case.

I have bailed out of all but two individual bonds. One I think will get called within a couple years so I will hold, the other is very illiquid and I get nothing but stoopid low bids, so I will hold (matures in 5 years anyway).
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Old 04-01-2010, 06:19 PM   #9
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I too bought some IG bonds last Summer (mostly well below par) and they have all shown nice appreciate to 5-10% above par. I intended to hold to maturity but have recently been called out of several of them. For one issue, that I had a 40% gain, I asked Fido about selling (to bank the gain in a nontax account) and was told they had to get a quote for each bond position I wanted to sell. The issue in question was showing a Trace value at par to slightly above, the best quote I could get was 97. I opted to hold for the income but a month later got called out of it at full par. Nice to have "some" decisions "go your way".
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Old 04-01-2010, 07:14 PM   #10
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I purchased a large number of corporate and muni bonds during the downturn, they have all appreciated nicely and Iím thinking of selling them (fidelity retail account). I know itís harder to sell and am looking for any insights or advice on selling individual bonds.

My experience (Vanguard and Schwab and round lots of $100,000) is that you will get hosed. Unless you have a real need for liquidity or are worried about deteriorating credit, it usually makes sense to hold to maturity.
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Old 04-01-2010, 09:04 PM   #11
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My experience (Vanguard and Schwab and round lots of $100,000) is that you will get hosed. Unless you have a real need for liquidity or are worried about deteriorating credit, it usually makes sense to hold to maturity.
The bond market spreads seem to have narrowed in recent years. (I have no where near the experience of either GusLevy or Brewer), so it isn't as painful to trade bonds as it used to be. Never the less I generally buy bonds with the intent of holding to maturity. I sold a few junk bonds that rallied in the last year.

My problem lately is I am finding a lot of bonds getting called. I check Yield to Call, but still if I buy a bond at below par I don't expect to see it called. I have held this California Muni since 96, and figured with the CA state and local revenue in such dire straits no way they'll call the bonds. Wrong so now I have to try and get 5.25 yield for a 15 year muni, not easy to find
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Old 04-02-2010, 09:29 AM   #12
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All you can do is try to avoid being badly beaten
This sums it up nicely and is what Iím going to do. This is more an opportunity to improve after tax cashflow, so if the price isnít right, Iíll just hold.
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Old 04-02-2010, 01:16 PM   #13
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This sums it up nicely and is what Iím going to do. This is more an opportunity to improve after tax cashflow, so if the price isnít right, Iíll just hold.
That is the beauty of bonds: if you do not like the bid price you can hold and eventually "sell" at maturity for par. Having said that, I think that if you are willing to be patient and pay attention you can sell bonds as a retailer and get reasonable execution now for all but the most illiquid issues. I even blasted out a measly 30k lot of an issue that was under $150MM out from a small cap issuer at a 1 point spread to the ask, so the bond market has clearly become more liquid recently.
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