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Tuesday, May 24, 2011

Interested in 2.35% for 11 months?

Being on the institutional money management side for a number of years, I had many conversations with colleagues about the huge discrepancy between what institutional traders transact bonds at as compared to individuals. In short, individuals face huge markups in the bond market when buying odd lots and huge markdowns when selling. For example, if you buy $50,000 principal amount of a 5-year IBM issue, you would pay a much higher price than an institution buying $5 million of the same bond. This is why today I recommend against individuals buying bonds and instead suggest bond index funds.

This goes beyond the fact that the bond market is an over-the-counter market and the institutional buyer gets coverage from numerous firms.

This, of course, always led to my wondering whether there wasn't a business opportunity available by giving better bid-offer spreads to the retail market.

My friends and I were never smart enough or energetic enough to figure out how to do this, but also the technology wasn't really there. Today this has all changed - at least the technology part. Investors are getting better opportunities to get competitive prices.

Along these lines, I recently came across a very interesting site at Zions Bank. Although I haven't used it, I have been following it and have to say that it looks promising for those, with time on their hands, who are in search of higher yields to follow ongoing auctions.

The site offers auctions (instructions available at the site) as follows:
Source: Zions Bank

CLICK TO ENLARGE  Note the Verizon 11-month bond yielding 2.35%. Again, if individuals have the time to do the research and follow the auctions, these types of issues at attractive yields are available for bid.
Click on "view auction" and you get:

CLICK TO ENLARGE  Here you see that there are 5 bidders and when the auction ends, along with detail on the issue.

Although I haven't used this auction site, I do find it interesting and potentially useful, especially for those seeking income.

I would be very interested to hear of the experiences other investors may have had with the site.

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