Are retail bond investors retarded?

[brewer12345]

I just got this e-mail:

Issuer Name: John Hancock Signature Notes
Type Of Instrument: Retail Note
Expected Credit Rating*: Moody's, A1; S&P, AA+
Expected Bond Maturities*: 09/15/2010
Anticipated Yield to Maturity: See below *
Payment Frequency: Monthly
Expected Call Features: Noncallable
Issuer Description: * Initial Coupon = 4.29% = 1.12 (fixed) +
3.17 (CPI), resets monthly.

Contrast the above to an I-bond. With the savings bond you get:
- tax deferral
- no state or local taxes
- zero credit risk
- A higher fixed component (1.2% vs. 1.12%)

Either retail bond investors are serious rubes, or I am missing something.

 

[ats5g]

I think you're missing [or just overlooking] the fact that brokers can't make money when retail investors buy I-bonds, unlike screwing retail investors in corps.

- Alec

 

[brewer12345]

The whole retail bond trading thing pisses me off. Registered bonds are not different than equity, so why hasn't the SEC/NYSE,NASD prodded the financial markets to trade them the same way? Imagine you could buy any bond you like by paying a $20 commission plus the bid ask spread, and the spread was as transparent as equity spreads. I'd trade a lot more bonds in that case.

 

[retire@40]

Registered bonds are not different than equity, so why hasn't the SEC/NYSE,NASD prodded the financial markets to trade them the same way?  Imagine you could buy any bond you like by paying a $20 commission plus the bid ask spread, and the spread was as transparent as equity spreads.  I'd trade a lot more bonds in that case.

I would get more into bonds too if that were the case (hen interest rates are a little higher for lower-risk bonds). I don't understand why they are not traded the same way either.

 

[brewer12345]

I got the same e-mail from Schwab.  Almost every e-mail I get from them is useless low yield bonds or companies that should be selling for 1/2 of what they are trying to IPO for.  It's almost like if Smith Barney or Merrill Lynch customers won't take the stuff, Schwab customers will.  I guarantee you, the Smith Barney's of the world have plenty of better opportunities that Schwab customers never actually get to see because the deals get fully subscribed by their customers.

Maybe some of the very high end ($100 million plus) guys do, but from what I have seen and heard, the clients of the full service guys mostly get "serviced" at least as much as the discounters do. At least with Schwab you know you won't be paying as much for the cornholing.

FWIW, I've never been interested in IPOs. Anything a small retail guy could actually get would be cheaper after the IPO anyway.

 

[Gone4Good]

The whole retail bond trading thing pisses me off.  Registered bonds are not different than equity, so why hasn't the SEC/NYSE,NASD prodded the financial markets to trade them the same way?  Imagine you could buy any bond you like by paying a $20 commission plus the bid ask spread, and the spread was as transparent as equity spreads.  I'd trade a lot more bonds in that case.

Security dealers have been fighting bond price transparency for years, with great success until recently.  Nonetheless, transparency is quite bad, resulting in horrible pricing for retail investors. 

Having said that, bonds are not equities!  Bonds are thinly traded and often issued in relative small sizes of a few hundred million par value (compare that with the tens of billions in market cap for many equities).  A significant amount of any new bond issuance disappears into insurance company accounts and seldom trades on the secondary market.  This prevents price discovery until said insurance company wants to sell.  Furthermore, each bond security is unique, with its own maturity, coupon, covenants, call features, seniority, etc. making bonds an inherently less liquid security than common equity.  Often times a specific bond is simply not available to buy - even for institutional investors!  This prevents the type of trading scheme you desire.

NASD has made progress in increasing bond price transparency.  You can visit this site to see recent trades in most corporate bonds ('http://www.nasdbondinfo.com');  Take a look and you'll be surprised how infrequently specific bonds trade.

Incidentally, "TRACE" is the name of the system that NASD uses to record these bond prices.  Next time you're looking to buy a bond from your broker it might be fun to tell him "You're offering me that bond at $107, but I just saw a trade on TRACE for $103" and see what he says.

Cheers.

 

[brewer12345]

Security dealers have been fighting bond price transparency for years, with great success until recently.  Nonetheless, transparency is quite bad, resulting in horrible pricing for retail investors. 

Having said that, bonds are not equities!  Bonds are thinly traded and often issued in relative small sizes of a few hundred million par value (compare that with the tens of billions in market cap for many equities).  A significant amount of any new bond issuance disappears into insurance company accounts and seldom trades on the secondary market.  This prevents price discovery until said insurance company wants to sell.  Furthermore, each bond security is unique, with its own maturity, coupon, covenants, call features, seniority, etc. making bonds an inherently less liquid security than common equity.  Often times a specific bond is simply not available to buy - even for institutional investors!  This prevents the type of trading scheme you desire.

NASD has made progress in increasing bond price transparency.  You can visit this site to see recent trades in most corporate bonds ('http://www.nasdbondinfo.com');  Take a look and you'll be surprised how infrequently specific bonds trade.

Incidentally, "TRACE" is the name of the system that NASD uses to record these bond prices.  Next time you're looking to buy a bond from your broker it might be fun to tell him "You're offering me that bond at $107, but I just saw a trade on TRACE for $103" and see what he says.

Cheers.

Yes, I am well aware of all that. However, I note that there are literally thousands of small cap companies with small floats that are successfully traded on various exchanges, so there is no reason the vast majory of bond issuances with, say, $100 million or more outstanding could be traded like equities.

I've never tried confronting a dealer with trace trades. Any luck on that?

 

[ats5g]

Hey Brewer,

I completely agree. Aren't dealers' quotes for OTC bonds usually disseminated through the "yellow sheets"? For OTCBB and Pink Sheet securities, one can get the inside quotes from the OTCBB and Pink Sheet websites. Is there no electronic place for dealers to post quotes for OTC bonds [perhaps by subscription], or do people that want to buy/sell have to physically call each dealer to get quotes, which are subject to change of course?

- Alec

 

[saluki9]

I've never tried confronting a dealer with trace trades. Any luck on that?

You should try it! It's pretty darn funny when you do. To make it even more fun, don't tell him where you got the numbers from.

He/she will of course propose a principal trade with a 1+1/4 markup. "yeah, but the last trades were over 1 point less than your price"

You will hear a loud "HUH?" followed by many many excuses

 

[brewer12345]

You should try it!  It's pretty darn funny when you do.  To make it even more fun, don't tell him where you got the numbers from.

He/she will of course propose a principal trade with a 1+1/4 markup.  "yeah, but the last trades were over 1 point less than your price"

You will hear a loud "HUH?" followed by many many excuses

Saluki, do you actually get them to back off their price, or do they insist on a fat dealer markup? I intend to put a goodly portion of next year's bonus into bonds, so this is of more than casual interest to me.

 

[saluki9]

Saluki, do you actually get them to back off their price, or do they insist on a fat dealer markup? I intend to put a goodly portion of next year's bonus into bonds, so this is of more than casual interest to me.

You bet they do. I'm stuck in kind of a weird spot of the bond market. Most brokers buy in 10K lots for individual clients, while most fund managers buy in 500K+ amounts.

Most of the accounts my team works on are in the $5M-$15M so we're buying in 100K-250K lots which gives us more leverage than retail buyers but not like fund mangers. I find that this is one of the scenarios where dealing with a human gives you a better price than a computer. Most dealers are happy to shave a little off of their piece to keep the business.